passive income
Truthfully, there are many methods to lower your effective tax rate, which is why when you make an income with two commas, it behooves you to hire a savvy accountant.
Passive income is money earned as a result of little effort and you can make money while you sleep, go on vacation, fall ill, or any other circumstance which would bar you from actively earning income.
Passive income does not solely avoid taxation simply for being passive. Special rules apply for passive income when it falls into qualified categories.
Money you earn from qualified passive activities receives preferential tax treatment, thereby making it a superior type of income compared to ordinary income.
In general, the IRS considers an activity passive if it involves rentals or any business in which the taxpayer does not materially participate.
Corporations can pay dividends, some of which are considered “qualified” and meet the long-term capital gains treatment.
A primary advantage of the REIT structure is to avoid taxation at the fund level and instead pass these payments through to the individual investor.
If you want more federal income tax-free income, you could buy municipal bonds from your state and pay no income taxes. However, the lower risk profile of these investments often allow for lower interest payments compared to their corporate bond counterparts.