There are essentially three types of income passive, earned and portfolio. When filing your income tax at the end of the year each one of these types of incomes have different taxes. This is why it is important that you completely understand the difference between each one.
Below is the definition of each one and the category they are in.
This is the simplest type of income to identify. This is income that is earned from having a job, owning a business, being involved in a business or any type of activity that you are paid for. Earned income involves wages, salary and tips.
This is the most common type of income. Earned income has a range of anywhere from 15% to 20% which adds up quickly. This type of income is also subject to various other taxes such as Medicare and Social Security. With these types of taxes earned income can be taxed up to as much as half of the gross amount of every paycheck. One big disadvantage of earned income is the total amount of deductions that can be taken. Earned income is not as plentiful as other types of income and is often referred to as “active income. Before filing your income tax it’s advised to consult a tax specialist about which types of deductions you qualify for. The more deductions you use the more you can get back on your tax refund.
Passive income is income that is earned from activities that you don’t always participate in such as business partnerships or real estate. In 1986 there were special rules that were passed regarding passive income that restricted exactly how much you can make. However, you can still earn approximately $25,000 and if your income is lower than $150,000 and also are active in real estate that gives you a passive income. This amount can range between $100,000 and $150,000. However other than this exception you are still allowed to earn between $100,000 and $150,000 in losses if there are other losses which cannot be claimed they can be carried forward until the property is disposed of. Other types of passive income including real estate can be claimed on Form 1031 if the proceeds are going to be used to purchase other properties or other forms of passive income.
This form of income comes from a portfolio which includes interest, capital gains, dividends or royalties. Each type of portfolio income is taxed differently. For example, capital gains are taxed at a rate of between 10% and 20% if held for longer than 12 months. Capital gains that are held for less than that are taxed as income. However, even though it is considered income at that point it still is not subject to Medicare or Social Security. One big advantage with capital gains is that it can be used to offset other investments. For example if one stock gained $12,000 and another lost $10,000 you could use capital gains to offset $2,000.
The word “inflation” can be a scary word for many people especially those that are already retired. However, it should be a word to keep in mind when protecting your investments. Basically the term inflation refers to the price increase for goods and services used by consumers. In the U.S. we measure inflation according to the National Consumer Price Index.
In recent years inflation has gone up to over 2%. This is the highest inflation has been since the Recession and could quite possibly be a sign of things to come.
Why Consumers Should Care About Inflating
Inflation is a growing concern for those on a tight budget or a fixed income because soon products and services they use on a daily basis will be going sky high. This means you would need at least $2,000 in a savings account just to cover household expenses for goods and services.
Here’s an example. Say your household expenses are around $1,850 every month. With inflation every year it means you will still be able to have the goods and services you use every day just not as much. With a 2% increase every year soon your household expenses would be more than you could afford on a fixed income or tight budget
Inflation also affects people who like to save money and have a nest egg. So if you have a savings account it doesn’t grow even with interest as fast as inflation rises. If your savings account has an interest rate of 0.5% and inflation is at 2% your products and services that you use will still cost more than you have in a savings account.
If you are currently saving for retirement and are putting 20% of your paycheck in the bank every month you still may not have enough to retire on because of inflation. The best thing to do is invest your money to ensure you have enough when you want to retire.
Tips To Protect Yourself
Always be aware of inflation as a consumer and as someone who wants to invest their money. If you don’t stay aware of inflation you will end up taking unnecessary risks as an investor. There are many different ways you can invest while protecting yourself.
One of the best ways to protect your money from inflation is investing in stocks. This is because all stocks make money by selling products and services. If prices go up all they need to do is sell the products or services far past the rate of inflation. Keep in mind that inflation is only bad for consumers not investors.
The most important thing to remember is that you always have to stay ahead of inflation by protecting your investments and stocks. Once you have your stocks and investments protected it will be easier to protect them from inflation. The general rule of thumb is to pick stocks that are products over ones that are services. It is far easier to sell products than services to protect yourself from inflation.
The definition of dividends is basically sharing the wealth of the company with its shareholders. There are two forms of dividends stock and cash.
A cash dividend is when a company pays back its shareholders and investors in check, cash or wire transfer. The company gives its shareholders and investor’s actual cash instead of filtering the money back into is operating funds. The main disadvantage to cash dividends is that it causes the value or price of the company to drop by the exact same amount it gave to its shareholders and investors. For example, say a company would give cash dividends equal to approximately 10% of the price of its stock, investors and shareholders would see their stocks drop by the same amount. This is due to the economic transfer. However, cash dividends can be very beneficial in that they can provide a source of income to shareholders and investors in addition to capital appreciation.
Stock dividends are the actual increase in the number of shares within a company with the newer shares actually being given to its shareholders. For example, say a company were to actually issue a stock dividend of say 10% it would also increase its shares by the same amount at the rate of 1 share for every 20 that are owned. So if a company had 200,000 shares the stock dividends would be 100,000 shares. So if you owned 200 shares in a company you would receive 20 additional shares.
However as with cash dividends this would not increase the actual value of the company. If the value was $20 a share the company’s value would be worth $20 million. After stock dividends the company value would be the same. Stock dividends are by choice. Shareholders can keep their stocks and hope they aren’t paid out via cash dividends or they could sell their extra shares creating their own cash dividends. Another big advantage of stock dividends is that shareholders normally don’t have to pay taxes on their dividends. However, taxes always need to be paid on stock dividends even if they are kept and used as cash.
Many people feel that stock dividends are better than cash dividends as long as the option for cash is not available. Cash dividends are not a bad thing there just aren’t any choices available. Shareholders and investors can still use any proceeds from cash dividends and put it back into the company via a dividend reinvestment plan.
Both types of dividends are great choices and it mostly depends on the choices each shareholder makes. It also depends on what each shareholder wants from the company they have shares in. if they are just looking for an investment and a reliable sources of month income then the choice is cash dividends. If the shareholder wants to actually invest in the company then choosing stock dividends is the best option. Stock dividends are also a good option for those that prefer selling extra stocks at the right price instead of using cash to buy additional shares.
With the economy the way it is today, everyone is looking for ways they can make a little extra money to pay for bills, groceries, or just have something to fall back on in case things get worse. While there are many ways you can go about creating some extra income, the best way is to rely on your own skills and experience to turn quick profits.
If you try to go out of your comfort zone and attempt something you’ve never done before, you’re going to spend a lot of time (and possibly money) to learn about that market, business, or service before you can really make any money from it. If you use your background and current knowledge, expertise, and skillset, though, you can often find yourself making a lot of quick cash easier than you thought possible.
One example is reselling products. If you know a lot about cars and see one listed in the local paper for a lot less than it’s worth, buying it and putting it back on the market for a higher price can be a quick way to make money simply off your knowledge. Of course buying and reselling cars takes a bit of start-up capital and you might have to resort to obtaining a business loan from a site like wongaforbusiness.com to get it off the ground, but the same principle can be applied to other, cheaper, items as well without the inherent risks involved with taking out loans.
If you’re a computer guy, going to local recycling places and computer shops you can probably pick up old used desktops and laptops for $50 or less. You might have to install an operating system on them but you can then list a “basic laptop perfect for Farmville and email” on craigslist for $100 – doubling what you spent on the machine and putting a hefty profit into your pocket with minimal work.
Even if you can’t use your knowledge or expertise to find an item that can be sold at a higher price, perhaps you can use what you know to create a small book or guide that can be sold online. If you have been a farmer all your life and you know how to build chicken houses, drawing up blueprints and writing a short guide on how to properly care for your animals could be very interesting and worth purchasing for someone from the city that has moved into a rural community and wants to raise chickens.
A good way to consider good financial health is to have enough money to meet our basic needs and live a comfortable life. However, as humans, we have material desires and we want that extra dough to fulfil those wants. Be it the next fancy gadget or a fast sports car. We all have a list of things we want. There is no harm in having wants because at some level it acts as a motivation to work extra hard and make extra money.
In the real world, many of us go through phases where we may be in need of some fast cash to deal with a financial implication that directly impacts on one of our ‘needs’. This is where the ability to loan money comes in handy because the instant delivery of the extra resources can mean the difference between having a roof over our head or not in an extreme case. However, one needs to tread with extreme caution while dealing with fast cash methods. For example, if you are availing a fast cash loan to pay for your house rent as mentioned above that is considered a definite ‘need’.
‘Fast cash’, as the name implies is easy to get in most cases and this is where it can be troublesome as well. It becomes a problem when we start thinking of fast cash as a means to fulfil our impulsive ‘wants’. Consider a scenario where you have been saving up some money to buy the next iPhone but are still short of cash. You don’t need it because your current phone works just fine but you want it because you love gadgets and you’ve been conditioned to want the best and brightest as soon as you can possibly get it. This is a terrible reason to consider loaning money, the real danger comes from people who have taken a fast cash loan before, they’re used to the process and thus may be more inclined to consider getting another loan to supplement their frivolous purchase, the use of the loan becomes a crutch of cash advancement to get what they want that much quicker. We need a return to the virtues of patience and saving!
It is no surprise that the convenience of the fast cash loan comes with certain challenges of its own. One of the biggest being the brutal interest charge. So, if you are using fast cash methods to pay for your wants you’re in trouble. Financial vehicles like this are there for a reason and have their benefits but if you abuse them, and become dependant on them as part of your regular budgeting, they can put you in a horrible financial mess and can often snowball out of your control very quickly.
So, next time you are considering the easy route of fast cash, ask yourself the exact reason why you need it. If it is serving your fundamental needs then there is a legitimate justification. If you do decide you have to opt for this route, make sure you consider a trusted and reliable fast cash provider. Take the time to research where you can get the best deals that balance the interest rate and the immediate availability of the funds when you need. By using fast cash methods judiciously you will ensure that you maintain a financial discipline that is critical to survive in this economy.
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