Passive Income: A Bridge to Financial Independence

Creating passive income is one of the most important parts of becoming financially independent. If you want to become financially independent, you are going to have to spend some time developing passive sources of income. Here are the basics of passive income and some of the benefits that you can receive from it.

Passive Income

Passive income is essentially money that you earn that you did not have to perform any work for. In many cases, you have invested a certain amount of money and it brings you a regular return. Examples of passive income could include making money from a website, receiving dividends from stocks, or getting rent payments from real estate. 

It Works For You

One of the biggest benefits of passive income is that you do not have to actually perform any physical labor in order to earn it. You are essentially getting y our money to work for you. In reality, there are only two ways that you can earn money. You can work and earn money or you can have your money work for you. If you want to become financially independent, it is advisable to have both methods of money making working in your favor. As you increase the amount of money that you have, you can increase the amount of passive income that you receive. Therefore, it can create a situation in which your income continues to grow and grow over the years. Ultimately, your goal should be to create as many sources of passive income as you can. Eventually, you will be able to replace your income from your job and you will be able to live off of your passive sources of income.

Tax Advantages

Another benefit of passive income is that you get certain tax advantages with it. One of the biggest tax advantages with passive income is that you are not going to have to pay Social Security and Medicare taxes on it. When you are self-employed, you have to pay 15.3 percent with these two taxes combined. When you get passive income, you are essentially going to be keeping 15 percent more of your money. 

Another common example of how passive income can help you with your taxes is in the area of rental investments. When you own rental property, you can actually depreciate a portion of them every year. According to the IRS rules, you can depreciate your property over a schedule of 27.5 years. This means that every year, you get to take the value of your property, divide it by 27.5 and then take that amount of deduction on your taxes. Because of this deduction, you could potentially be making a real profit on your rental investments but still be showing a loss according to the IRS. You would then be able to use the additional deduction on your personal income. Overall, this could be a substantial savings on your tax bill. 

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