3 Types of Income on Taxes


I recently watched another video by the famous educator Robert Kiyosaki that tackles about the three types of income. We already know two types of income – the active income and the passive income. Active income is you working for money and passive income is your money working for you.

But active income can be further classified into two: Earned Income and Portfolio Income. So what are the differences? You can clearly see the difference when it comes to taxes.

 

Earned Income – Earned income is the income we get from our jobs. It is the fruit of our hard work and labor. When your parents tell you to study hard, get good grades, and get a safe and secure job – that’s earned income.

However, as Robert Kiyosaki said, earned income is the most expensive of all types of income because of taxes. In the US, earned income has a usual tax of 50%. Here in the Philippines, I think it’s around 30%. So who benefits more from your hard work and labor when you earn earned income? – The Government.

It will be nice if there will be big leap of our country towards progress and development but with the rampant graft and corruption in our country, we, as tax payers are on the loosing end.

Portfolio Income – Portfolio income is the income you get from your portfolio of investments. When somebody tell you that you should buy this house because the price may increase or you should buy this stock because the price may go up – that’s portfolio income. It’s also called capital gains.

However, as Robert Kiyosaki said, portfolio income is the second most expensive income in terms of taxes. In the US, portfolio income has a usual tax of 20%. Here in the Philippines, I think it’s 10% to 12%. So who benefits more from your hard work and labor when you earn portfolio income? – The Brokers.

Passive Income – Passive income is the income you get continuously on a regular basis. And as Robert Kiyosaki said, if you are smart enough, you can get as low as 0% tax for passive income legally.

Looking back at the cash flow quadrant, if you are an employee or self-employed, you are working primarily for earned income – the most expensive of all types of income.

However, if you are a business owner or investor, you are working primarily for portfolio income and passive income – both of which provide you with the most ‘net income’ because of less tax.

We must then develop the entrepreneur and investor inside of us. Most of us start with earned income but as we earn earned income, we must slowly divert from earned income to either portfolio income or much better passive income.

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Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

10 responses on “3 Types of Income on Taxes

  1. sipag ah, post agad, eheheh!

    hey, nice meeting you last night. it was a great event.

    3am na kmi nakauwi kaya bangag pa, wala pang maisip na post wahahah!

    see you next time bro. 😀

  2. sayang pro we never had a chance na magkausap sa eb..nakita pa naman kita dun..anyways till next time.kita kits nalang ulit sa mata..hehehe congrats din kahit papaano honorable mention naman tong blog mo..sayang nga di nakaabot sa top 10 hayyyzz

  3. nice meeting you last Saturday, tyrone! sayang at 10.5 yung rank mo sa emerging influential blogs of 2009. But I know you are still a winner.

    On topic, for taxes on individual income, the maximum is 30%. Those earning lower are taxed less. It’s 30% for corporations, but there could be tax-exempt transactions.

    One can also maximize their spare cash by investing/joining in Cooperatives.

  4. Nice meeting you too. By the way, how did you know naman na 10.5 yung rank ko sa emerging influential blogs? Pero thanks pa rin for the vote. Good point for the topic.

  5. I am not a business minded person.. however, as I read your post.. I learn something today. Passive and Active income; earned and portfolio income.

    Wala talaga umaasenso sa pagtatrabaho, only those who are in business ang umaangat lalo..

    sana maka bisita ka ulit sa blog ko.

  6. Hi Tyrone, nice post. Passive income is the way to go! One way of looking at it is earned income from January up to mid April actually ends up with the government in the form of taxes… sigh.

    Wow, nakapunta ka pala sa awards night. Sayang I wasn’t able to make it due to a previous commitment. Congrats pa rin to you and all the winners!

    @ceblogger, curious din ako sa score ni Tyrone na 10.5, how was this arrived at? I voted din kasi for Millionaire Acts… hehe.

  7. tyrone/jay, i just made up the 10.1 10.5, etc… because i believe they are also emerging influential bloggers na hindi lang umabot sa top 10. part of the top 20 din but i could not exactly recall the order.

  8. Robert Kiyosaki’s principles are really good, no question about it. But the principles should be applied in context in the Philippine setting. One; there is no such thing as passive income in the National Internal Revenue Code. The National Internal Revenue Code recognizes only two kinds of income in the Philippines: Earned/Business income and Portfolio income.

    Earned/Business income is pegged at 5 to 32% for individuals and 30% fixed for corporations.

    Portfolio income is 20% except in cases of books and compositions which is 10%.

    Rental income from real estate is taxed at a final withholding tax of 15% only if the owner of the property in question has other sources of income. If not, it is taxed at Earned/Business income rates.

    In order to apply Kiyosaki’s teachings in the Philippines, one must increase his portfolio income.

    Real estate is a death trap here in the Philippines. The following taxes are imposed on real estate: 1) 6% of gross selling price or fair market value whichever is higher.
    2) 1% of gross selling price or fair market value for documentary stamps.
    3) Real estate tax of up to 1% of the assess value of the property for a province or 2% for a city or municipality (the municipality must be located within the Greater Manila Area, otherwise it is taxed at provincial rates)
    4) 1% of assessed value for additional levy for Special Education Fund
    5) 5% of assessed value for idle lands
    6) The 15% final withholding tax mentioned above

    Therefore, total amount of taxation for real estate is 14 or 15% depending on the location of the property. This does not include the 15% final withholding tax.

    The goal of Kiyosaki in “Rich Dad’s Guide to Investing” is to adapt one’s business scheme to the prevailing laws of the country where the business is to be set up. That means his teachings must be adapted to the Philippine setting, and not the other way around (he cites US laws only as an example, but most real estate owners apply Kiyosaki’s principles blindly.)

    Hope this information ads up to the entire topic.

    More about Philippine laws in PhilCritic

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