Your Income Portfolio

Any experienced share portfolio manager will tell you how important diversification is to your ongoing success and risk management.

The same goes for your Income Portfolio. Having income from various sources, that each rely on different market drivers helps to protect your income from total destruction, and ensures that you are more likely to continue to receive an income whatever the economy.

Your income portfolio consists of:

1. Earned Income - income earned for your personal exertion. This includes incomre from wages, salary and self employed business income. All sources of earned income is subject to both income tax and self-employment tax (Social Security and Medicare).
2. Passive Income - generated from something other than personal services and is not subject to self-employment tax. Passive income includes rental property income, royalties and online income. It may also include income from limited partnerships, where you have a passive [sleeping] role.
3. Investment Income - similar to passive income, from interest, dividends, and capital gains. It is subject to income tax, but not self-employment tax. Capital gains attracts less tax [maximum rate of 15 percent].
4. Deferred Income - do not currently pay tax on , but you expect to pay tax on at some time in the future. This includes Retirement plans - you will most likely pay tax when money is removed from your retirement plan, when you may be in a lower tax bracket than now. Section 1031 exchanges are also used to generate tax-deferred income for real estate properties when you sell a piece of property at a gain and defer the tax on that gain by acquiring another investment property. Note- There are certain parameters you have to meet for effectively using Section 1031 exchanges.
5. Tax-Free Income - most common form is the sale of your personal residence. A house used as your principal, residence for any two of the preceding five years, enjoys a tax-free capital gain up to the first $250,000 [for a single filer] or $500,000 [for married filers]. Tax free income yields may be lower, but due to the zero tax, they represent a higher effective rate of return higher than many after-tax investments.

Income Portfolio Strategy

1. Earned Income - Minimize
2. Passive Income - Maximise
3. Investment Income - move as much as possible to capital gains category
4. Deferred Income - move as much surplus earned and passive income into this category
5. Tax Free Income - structure deals as much as possible to tax free advantages

A very worthwhile book to understand how to move your income into more beneficial quadrants is the Rich Man Poor Man Series by Dr Robert Robert T. Kiyosaki. For a small investment you can gain incredible value in how to restructure your wealth.