Differentiate between active income, passive income and portfolio income.
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-This is the income an individual earns through participating in some activity with the goal of earning income. This is why the terms active income and earned income are often used interchangeably. For this to be active involvement the activity must be heavily used with the explicit purpose of gaining income.
Wages earned during regular employment, tips that go along with any employment wages, or bonuses achieved during regular employment would all be active income.
-This is income earned through a trade or investment in which the individual does not spend much time or effort. If this is the regular employment of the individual for which he/she is directly compensated it would be active income.
If an individual owns rental property, but hires an individual for the daily management of the property, any income derived would be passive income. This is true because the individual isn't constantly involved in daily operations of the rental investment. Often, income gained as a silent minority partner in an investment would also qualify as this passive income.
-This type of income is derived directly from investments such as stock earnings, mutual fund investments, or interest income.
If you receive dividends from a corporation for owning stock in that corporation it would be portfolio income since your investment portfolio is generating the income.
BS in Accounting and BS in Finance