How Passive Income Tax Rates Are Calculated

Establishing passive income streams is a wise move, especially for retirement planning. Also sometimes referred to as "mailbox money," passive income is earned without physical effort. It may be derived from investments with platforms like Yieldstreet that generate interest, dividends, capital gains, or rental income.

Passive income includes funds like rent payments, investment dividends, or profits from appreciated investments. In contrast, active income comes from work-related fees, salaries, or wages. Taxes on both types of income vary based on the recipient's tax bracket and income classification.

Key sources of passive income include self-charged interest, rental income, and business investments. Self-charged interest results from a person lending to their own business, and rental income is passive unless managed actively by a real estate professional. Business investment income is passive if the receiver is not involved in operations.

Passive income taxes differ for long-term capital gains and qualified dividends. Short-term gains are taxed at ordinary income rates, while long-term gains and qualified dividends are taxed at 0%, 15%, or 20%, based on annual taxable income and filing status. Municipal bond income is generally tax-free federally, but may incur state taxes.