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Matt Kesler
Matt Kesler, Accountant
Category: Tax
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Experience:  BS in Accounting and BS in Finance
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Differentiate between active income, passive income and ...

Resolved Question:

Differentiate between active income, passive income and portfolio income.
Submitted: 9 years ago.
Category: Tax
Expert:  Matt Kesler replied 9 years ago.
Thanks for using Just Answer! Please let me know if you need additional depth for any of these definitions. I'll define them accurately with an example of each.

Active Income
-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.

For Example.
Wages earned during regular employment, tips that go along with any employment wages, or bonuses achieved during regular employment would all be active income.

Passive 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.

For Example.
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.

Portfolio Income
-This type of income is derived directly from investments such as stock earnings, mutual fund investments, or interest income.

For Example.
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.
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