IRS Defines 3 Types of Income

… In direct opposition to the idea that you have to be employed in order to earn income, is the notion of passive income.  The concept of earning income without work is quite difficult for most of us to comprehend since we’ve all been conditioned by our parents and teachers that we must “work hard” in order to achieve.  What they didn’t tell us is that by working smart, we can greatly diminish the amount of effort required to achieve our goals.

In direct opposition to the idea that you have to be employed in order to earn income, is the notion of passive income.  The concept of earning income without work is quite difficult for most of us to comprehend since we’ve all been conditioned by our parents and teachers that we must “work hard” in order to achieve.  What they didn’t tell us is that by working smart, we can greatly diminish the amount of effort required to achieve our goals.

The Internal Revenue Service defines passive income as income from “trade or business activities in which you do not materially participate…” If it seems to you that this definition implies a possibility of earning income without working for it – without your material participation, you are right!  This is, in fact, the implication.  I like to illustrate passive income in the following way.  Imagine you have a wallet with $3,000 in it.  On the first day of the month you open your wallet and take-out $3,000 to spend on whatever, leaving the wallet completely empty.  But by the first of the next month another $3,000 magically appears inside the wallet, ready to be spent all over again.  I call this metaphor The Magic Wallet, and it is my financial goal in life.  Now, if you want to have a little fun, try imagining $20,000 instead of $3,000.  Welcome to the life of the financially free!

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