Passive Income

  • HEALTH SAVINGS ACCOUNT (HSA) -are like personal savings accounts, but the money in them is used to pay for health care expenses. “A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.”
    • 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.
    • Cons
      • High deductible
      • May not be a good idea if you know you will be needing expensive medical care in the near future.
  • COVERDELL EDUCATION SAVINGS ACCOUNT (ESA) – According to the IRS, is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses but also to qualified elementary and secondary education expenses.
    • When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary.

  • OPPORTUNITY ZONES – Introduced as part of the Tax Cuts and Jobs Act in 2018.
    • economic development tool to encourage long-term investment and job creation in designated, distressed communities
    • investment encouraged by providing tax benefits to Investors that invest the number of eligible gains into equity in Qualified Opportunity Funds
    • Taxpayers can defer and potentially reduce taxation on capital gains
    • 8,764 designated Qualified Opportunity Zones.
    • Qualified Opportunity Zones have been designated in all 50 states, including Alaska, Hawaii, the District of Columbia, and 5 US Territories.
  • BLOGS, TIKTOK, INSTAGRAM, YOUTUBE videos – 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 views. Ma 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)

*NotePresident 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.

One strategy to consider if you make large contributions to charity consider donating appreciated long-term held securities (i.e., stocks, bonds, options, futures). You would get a charitable deduction for the fair market value of the securities and not have to report the capital gain/loss income (see Tax Tips). (Cont’d)

Published by Williams Accounting LLC

Williams Accounting LLC is a Las Vegas-based accounting, tax, and financial consulting firm that works with clients to achieve the best solutions for their business.

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