Passive Income
Earnings generated with minimal ongoing effort, such as dividends, rental income, interest, or royalties.
What is Passive Income?
Passive income refers to earnings generated with minimal active day-to-day involvement, distinguishing it from wages or active business income. Common sources include dividend income from stocks, rental income from properties, interest from bonds or savings, royalties from intellectual property, and distributions from limited partnerships. The IRS has a specific definition of passive activity that governs how such income is taxed and whether losses can offset active income.
Example
An investor with $500,000 in dividend-paying stocks earning a 4% yield generates $20,000 per year in passive dividend income. Combined with rental income from a property and bond interest, this passive income stream can cover living expenses and support financial independence goals.
Source: IRS — Passive Activity and At-Risk Rules (Publication 925)