Passive Activity Income
When I think of passive income, I think of income that I don’t have to do much to earn. I don’t have to work for it; don’t need documents and proposals to make decisions about it, and the extent of my involvement is pretty much to open an envelope and take a check to the bank.
My perception of passive income may be correct in a logical world, but the Internal Revenue Service has very different ideas about passive income. For IRS, there is a long list of things that define what a passive activity involves and further, how it is taxed.
Interestingly, interest and dividend is investment income, not passive income. Passive income for IRS could be income from a business that I actually do some work in, like count the cash drawers or sweep the floors, but I don’t spend most of my time doing. The rules are complex, but they are important, especially for one new reason: The extra “tax” imposed by the Affordable Care Act.
Passive business losses are not allowable, in most cases, in calculating whether you have to pay either the 3.8% additional tax for those whose income is over $250,000 ($200,000 for single folks) or the .9% for those with wages and other earned income over those amounts.