Keys to Tax Planning: Understanding the 3 Types of Income

Understanding the type of income you earn is the key to developing a tax plan.

Income in the United States is characterized in 3 different ways for tax purposes:


1. Non-Passive Income – W2 Income, 1099 Income, Business Owners

2. Passive Income - Real Estate Rentals, Royalties, Passive Business Interests

3. Portfolio Income – Capital Gains, Interest, Dividends


Each of the three are taxed differently. Most taxpayers earn non-passive income. By default, non-passive income is subject to higher tax rates then passive or portfolio income. 


For example, in 2021, a non-passive income earner who makes $200,000 W2 income annually will owe roughly $40,000 in taxes. Another taxpayer in 2021 with passive income from rental property can earn $2,000,000 annually and owe $0 in tax. Passive income, particularly through real estate is the holy grail of tax savings. Real estate investing leverages depreciation, which can reduce or eliminate a taxpayer’s tax obligation. The IRS offers tax incentives to anyone who wishes to participate in real estate.


If most of your income comes from non-passive or portfolio sources, there are still strategies that can be used to lower your tax obligation.  Identifying the type of income you earn is the key to developing the proper strategy.  Techniques used by an investor with high capital gains from stocks will be totally different from a business owner or an employee with high W2 income. At Pulver CPA we work with taxpayers from across the country to develop tax savings plans. We ensure they are using the appropriate IRS incentives and maximizing their wealth year over year.  Whether you are a high W-2 income earner in New York, or an entrepreneur in Miami Florida we will guide you on the path to tax savings.