Breaking Down Taxes: Mundo Explores Types of Income

When thinking about nomad capitalist services and global structures, there's a word that never ceases to float around in the air: this word is “tax”.

For many, especially those with different types of income, taxation remains a mystery and those with complex affairs mostly rely on a professional to do their taxes. 

In some cases, the question can be simplified through flat fees, in others, the employer acts as an agent retaining the corresponding amount right from the wage. Nevertheless, the matter continues to be important because it includes the possibility of applying exemptions, double taxation treaties, or deductions.

Best case scenario, the reader has somebody who knows what types of income are there and how to tax them, but the person has no idea of what types of income tax they're paying or why. They simply stand back and watch a share of their profit disappear into the arcs of the government. This is why Mundo decided to write a piece on one of the taxation basics.

Types of Income: Tax and Its Different Applications

If there's tax, there's revenue or some kind of cash flow. Every person producing or generating money in any way is tax-liable. Now we can’t start thinking about tax without considering what types of income are there, that is, how we obtain that cash flow.

A subject that seemed complex two minutes ago becomes simple if we break it down, and here is our conclusion: there are two main types of income. Afterwards, they can be derived into subtypes, but pointing out these first two stages is key. When it comes to types of income, tax is estimated based on active income and passive income, also known as earned or unearned.

What Types of Income Are There: Active Income

A person perceives active income when receiving money in exchange for a service, product, or action. In simple words, when a person invests time and effort into an activity and gets rewarded with money, this is considered active income. Mainly we're talking about employees or company owners who are actively involved in their business.

In this regard, when it comes to types of income, tax, and activities, the amount paid will vary depending on the jurisdiction, types of operations, and structure.

In countries with territorial taxation, like Panama for example, foreign income won't be taxed regardless of whether it's active or passive, but these funds must be generated and perceived abroad. Any income transferred to Panama and received in Panama will be taxed in the same way as income generated inside the country. Even so, the tax rate here is better than in most places and there are plenty of incentives for companies incorporated in free zones and special economic areas.

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What Types of Income Are There: Passive Income

Unearned income or passive income is the one you get with “no effort”, that is, without trading time or a specific activity for money. You may have noticed the quotation marks on the words “no effort”. A vital part of the equation is the fact that obtaining passive income requires effort as any other approach, also investment, research, and a great deal of dedication. The result is earning one’s right to receive income without necessarily exchanging it for time.

What types of income are these? We're talking about dividends derived from investments, dividends from, let's say, an LLC, royalties from patents, music, or books. A common form of passive income derives from rental activities, i.e., investing in a real estate portfolio to rent the properties out. 

If a person purchases an apartment in Panama, for example, they can use it for short-term rental. Moreover, some of the projects available include a short-term rental license along with advanced amenities and prime locations. Thus, this activity falls into the category of passive income.

Other sources of passive income are considered to be pensions, alimonies, Social Security reliefs, and payments from unemployment insurance.

Different Types of Income: Tax Differences

All in all, the first thing to consider when doing taxes is what type of income the person has. From there, the intricacies are many, but we have a clear understanding of where it all starts. In general, wages are subject to Social Security, pension, tuition, and medical insurance taxes while passive income is not.

Disclaimer: this article presents general information on what types of income are there, but it's not based on formal research. Therefore, this article should not be taken as financial, legal, or tax advice. Complying with taxes thoroughly is important, therefore, we recommend consulting with a tax expert in the corresponding jurisdiction or jurisdictions.

Types of Income: Active Vs Passive

We have presented the basics of taxation by describing the two essential types of income. This is only the beginning. Now you and your advisor must figure out all the characteristics specific to your activity or activities and the possibility of deductions, exemptions, or reliefs.

Mundo is an online journal dedicated to the search for financial freedom. We are committed to helping people achieve their goals effectively and consistently. Talk to our experts if you're interested in services abroad like real estate, banking, company incorporation, trust services, and investment migration. We're here for you if you have any concerns or questions.

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