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February 16, 2021 at 8:00 PM

"When I got laid off from my job in 2015, I promised myself that I’d do whatever it took to become my own boss and never go back to a full-time job."

"Quarantine has given us all time and solitude to think—a risk for any individual, and a threat to any status quo."

These conditions in the workplace have increased interest in alternate, additional income streams such as passive income. One appeal of passive income is its tax treatment. Let's review the basic concepts.

Types of Passive Income:


REAL ESTATE - The most popularly written about passive income stream. From an accountant's perspective (my perspective), one who has prepared 1,000's of tax returns, this passive income stream requires the most effort. This works well for highly motivated, organized individuals. The optimal situation is having a management company that handles everything tenant related including the collection of rent, repairs, finding prospective tenants, evictions, late fees, and preparation of monthly and yearly statements.

  • Some individuals do not mind handling all tenant-related items themselves but for most, this is a chore and if the record-keeping is unorganized, it will delay the preparation of the tax return (see Things Your CPA Will Not Tell You).
  • Many of my real estate clients rely on rental income as their sole source of income. Their tax returns usually reflect a loss which carryforwards to the next year. (Passive activity income losses can only be taken if there is another source of passive activity income, for example, Schedule K-1 profits to counter the loss). Subject to Passive Activity Rules. I find that commercial real estate is less of a hassle but requires a higher initial investment than residential real estate.
  • Airbnb - short-term rentals. I wish people that offer these short-term rentals would align their mindset with that of a hotel owner - organization is key to tracking income and expenses. Passive Activity Rules may not apply.
  • Tax treatment - Subject to maximum federal capital gains tax rate from any portion of the gain (sale) on commercial real estate. For 2018 tax reporting, at a top capital gains rate of 25% and might be subject to an additional 3.8% tax for net investment income.
  • When you are ready to sell your real property see attached: 1031 Exchanges (Like-Kind) to learn the steps to defer capital gains taxes.

INTEREST INCOME- this includes high-interest savings accounts, money market savings, and certificate accounts (CDs). The optimal situation is compounding interest. When you deposit money in a savings account or a similar account, you will usually receive interest based on the amount that you deposited. Compound interest is interest that you earn on interest. › banking › what-is-compound.

    • While a $100,000 deposit that receives 5% simple annual interest would earn $50,000 in total interest over 10 years, the annual compound interest of 5% on $10,000 would amount to $62,889.46 over the same period. If the compounding period were instead paid monthly over the same 10-year period at 5% compound interest, the total interest would instead grow to $64,700.95.
    • Tax treatment - Taxed as ordinary income depending on your tax bracket.
    • Credit unions - I would recommend opening an account at a credit union. Credit unions offer various interest accounts, usually pay higher interest rates than ordinary banks, and offer low fees.

ROYALTIES - payments received for original works such as books, films, articles, poems, trademarks, trade names, service marks, or copyright. I recently prepared a client's tax return who receives $20,000 annually from an internet service provider for the use of their land for an internet tower. Rights to Royalties such as song lyrics can be purchased from various websites.

STOCK DIVIDENDS - Monthly, Quarterly.

    • Notice that I limited investing in the stock market to stock dividends. To be a successful stock investor requires a lot of work. My clients that are successful investors dedicate many hours every day. This is their full-time job (i.e., day traders) and not a passive income stream. A successful investor needs to invest a lot of time in researching stocks (e.g., Options, ETFs, Futures, Swaps) before purchasing. To achieve success, an investor should begin by researching a company's financial statements, the competition, reading the latest industry news, company news, CEO news, innovations, and trends. (Filings & Forms)
    • Here is some helpful incite from a young investor in the stock market

bull vs bear markets.jpg


  1. I began by investing in stock dividends by emulating Warren Buffett. First, I reviewed his holdings.
  2. Next, I reviewed a list of Dividend Aristocrats. "A Dividend Aristocrat is a company in the S&P 500 that has paid and increased its base dividend every year for at least 25 consecutive years."
  3. What is great about today's market is there are apps that allow you to invest in stocks partially (CashApp, STASH). Whereas in the past, a substantial amount of money and a financial advisor were required to invest. So, this is where I started. I made an excel spreadsheet, checked the dividend yields (average 3%), checked the companies' beta (i.e., risk assessment), and industry sector, reviewed financial statements, and chose accordingly.
  4. I also have a high-interest savings account, a Money-Market checking account (credit union), and various CDs (certificate of deposit) 3-month, 6-month, 12-month, an HSA, Employee Stock Purchase Plan (ESPP), and a 401(K). I am working on royalty income, blog revenue, and maybe a municipal bond also. As you can see, I am very conservative when it comes to investing. I believe in a low-risk strategy. I review, research, and adjust periodically.

BONDS- "A bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond. Investors have many choices when investing in bonds, but bonds are classified into four main types: Treasury, corporate, municipal, and foreign. Each type differs with respect to expected return and degree of risk."(1)

  • Treasury Bonds -sometimes referred to as government bonds, are issued by the U.S. federal government. (1) It is reasonable to assume that the federal government will make good on its promised payments, so these bonds have almost no default risk. However, Treasury bond prices decline when interest rates rise, so they are not free of all risks. (1)
  • The U.S. Treasury issues three types of securities: “bills,” “notes,” and “bonds.” A bond makes an equal payment every 6 months until it matures, at which time it makes an additional lump-sum payment. If the maturity at the time of issue is less than 10 years, the security is called a note rather than a bond. A T-bill has a maturity of 52 weeks or less at the time of issue, and it makes no payments at all until it matures. Thus, T-bills are sold initially at a discount to their face, or maturity, value. (1)
  • Tax treatment- Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes
  • Corporate Bonds - issued by corporations. Unlike Treasury bonds, corporate bonds are exposed to default risk-if the issuing company gets into trouble, it may be unable to make the promised interest and principal payments. Different corporate bonds have different levels of default risk, depending on the issuing company’s characteristics and the terms of the specific bond. Default risk is often referred to as “credit risk,” and the larger the credit risk, the higher the interest rate the issuer must pay. (1)
  • Municipal Bonds - or “munis,” are issued by state and local governments. Like corporate bonds, munis have default risk. However, munis offer one major advantage: The interest earned on most municipal bonds is exempt from federal taxes and from state taxes if the holder is a resident of the issuing state. Consequently, municipal bonds carry interest rates that are considerably lower than those on corporate bonds with the same default risk. (1)
  • muni bonds generally require a $5,000 minimum investment, while corporate bonds start at $1,000"
  • Foreign Bonds - are issued by foreign governments or foreign corporations. Foreign corporate bonds are, of course, exposed to default risk, and so are some foreign government bonds. An additional risk exists if the bonds are denominated in a currency other than that of the investor’s home currency. For example, if a U.S. investor purchases a corporate bond denominated in Japanese yen and if the yen subsequently falls relative to the dollar, then the investor will lose money even if the company does not default on its bond. (Cont'd)

HEALTH SAVINGS ACCOUNT (HSA) - "A High Deductible Health Plan (HDHP) is a health plan product that combines a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA), traditional medical coverage and a tax-advantaged way to help save for future medical expenses while providing flexibility and discretion over how you use your health care dollars today. ... the annual deductible must be met before plan benefits are paid for services other than in-network preventive care services, which are fully covered."

  • Pros:
    • The ability to pay for medical expenses with pre-tax money.
    • The option to build retirement savings that can be used at any time without taxes or penalties. Once you turn 65, the funds can be used for anything.
    • Contributions reduce taxable income
    • Contributions made to your HSA by your employer may be excluded from your gross income.
    • "Protect you against catastrophic out-of-pocket expenses for covered services. Once your annual out-of-pocket expenses for covered services from in-network providers, including deductibles, copayments and coinsurance, reaches the pre-determined catastrophic limit, the plan pays 100% of the allowable amount for the remainder of the calendar year. It is important to remember once the catastrophic maximum is met, you will not incur additional out-of-pocket medical expenses for in-network care, including doctor visit co-payments and prescriptions which are excluded from some traditional plan’s catastrophic limits."
  • Cons
    • High deductible
    • May not be a good idea if you know you will be needing expensive medical care in the near future.
    • Note: Many HSA account holders do not invest their savings and are missing out on an opportunity to add to their funds.

BLOGS, TIKTOK, INSTAGRAM, YOUTUBE Monetize your knowledge through monthly subscriptions, short videos, reels, or paid content.

Ma launched her channel in 2010 and has amassed multiple videos with over 1 million viewsMa broke down her earnings to Insider from the YouTube Partner Program by month.

So far in 2021, she’s grossed $32,200 from her YouTube channel.

Capital Gains Tax

As mentioned before, the appeal of passive income is any profit or gain from a sale is subject to capital gains tax. Capital assets include stocks, bonds, precious metals, jewelry, and real estate. Short-term capital gains are taxed at the same rate as your ordinary income. These are assets held less than one year before sale. Long-term capital assets are held for more than one year before they are sold. Long-term capital gains are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%. (2)

*Note - President Biden is reportedly proposing to raise taxes on long-term capital gains for individuals earning $1 million or more to 39.6%. Added to the existing 3.8% investment surtax on higher-income investors, the tax could rise to 43.4%, not counting state taxes.



Annuities - - "Annuities are contractual guarantees between you and an insurance company, either as a single deposit or multiple payments. In exchange, the insurance company follows through on the terms of the contract. Annuities grow tax-deferred until the interest is withdrawn, and payments can be taken as a lump sum (which, although I’ve seen it, is not what I’d recommend) or through periodic distributions." Carlos Dias Jr, Wealth Advisor

  • "As another example of growing annuities, suppose you need to accumulate $100,000 in 10 years. You plan to make a deposit in a bank now, at Time 0, and then make 9 more deposits at the beginning of each of the following 9 years, for a total of 10 deposits. The bank pays 6% interest, you expect inflation to be 2% per year, and you plan to increase your annual deposits at the inflation rate. How much must you deposit initially? Thus, a deposit of $6,598.87 made at time 0 and growing by 2% per year will accumulate to $100,000 by Year 10 if the interest rate is 6%." (1)


First, what are your goals?

  • To supplement your income - Maybe your goal is to reduce the amount of time you work for someone else, to free up time to allow you to dedicate more time working towards building your own business, or you want to spend more time with family, or traveling.
  • To replace your W-2 income - set a goal, set a timetable, list steps to achieve a goal, implement, reassess, and readjust.
  • As a strategy to move a low-risk, low-interest savings account into a higher-earning, higher-risk account
  • To make your substantial, short-term income last longer - A professional athlete such as a football player may only be projected to play for 3 to 4 years. How can they make this income last for 20 years? Maybe you won a million-dollar lottery prize or some such situation where you receive a large, lump sum of money and want to ensure it lasts for years. The key is to live off the interest and never touch the principal.
  • To save for an Emergency Fund or College Fund
  • To save for retirement or supplement your retirement. Best-case scenario: retirement income from multiple sources

How to Achieve Your Passive Income Goals:

  • Calculate the amount of money needed per month-include monthly expenses (i.e., rent, mortgage, insurance, property taxes, utility bills, disposable income needs)
  • Calculate how much initial investment is needed to achieve your goal.
  • For example, your monthly expenses are $2,000. What mix of income streams will equal $2,000 monthly? An investment of $10,000 in monthly stock dividends that yield 3% will yield $300 monthly. You are a freelance writer, you sell a product on Instagram, you have a mix of 6-month and 12-month certificates of deposits (CD), calculate.

*Note - Never, ever, ever, ever, ever put all your money in one investment (see When the Feds Raided). "My friend is starting a restaurant so I gave them $50,000 in seed money." Restaurants have a very low-profit margin as does any business in a hyper-competitive industry. I personally would never invest in anything associated with a friend or acquaintance. Speak with an accountant before you invest large sums of money. An accountant can assess the risk, and historical industry profit margins, and calculate the time value of your money. Your investments should vary in risk - CDs, most bonds, annuities, and HSAs are low-risk investments.

Stocks vary in risk - if beta equals 1.0, the stock has average risk. If beta > 1.0, the stock is riskier than average. If beta < 1.0, the stock is less risky than average.


How to be Your Own Financial Planner


(1) Ehrhardt, Brigham. Financial Management Theory & Practice, Thirteen Edition.

(2) Internal Revenue Service. “Topic No. 409 Capital Gains and Losses.” Accessed Jan. 5, 2021.