(Continuing..) Let’s talk about another difference between active and passive income, i.e. tax efficiency.
First, you might have to explain to kids what taxes are. Tax is the main source of government income to provide services to the society, e.g. building roads, building schools & hospitals, public safety, and health facilities, social welfare and etc. Citizens have to pay salary tax, company have to pay profit tax, stocks & property transactions are subject to stamp duty.
Tax is an obligation for everyone in the society and cannot be avoided. Payable tax rate of active income generator is generally higher than that of a passive income generator. e.g. Operation expenses of a company may be tax deductible as the companies provide job opportunities to people which is, in the eyes of the government, a kind of social responsibilities. When people have jobs, it reduces the government’s burden on social welfare. With good tax knowledge and planning, you may benefit tax efficiency from earning passive income.
Disclaimer: FinKAB does not provide any investment or tax advices. Readers are advised to seek help from professional advisors on any investment or tax matters.