With the advent of the internet, social media, and the growing popularity of blogs, a relatively new source of passive income has emerged. Today, “affiliate marketing” which is typically generated when targeted advertisements are placed on high traffic websites, has become a major revenue source for individuals with popular websites and blogs. When readers click advertisement links and/or make purchases from a website, the operator of the site makes a small profit, hence the term, “affiliate marketing”. For popular sites, this profit can accumulate into quite a substantial amount of passive income.
Unlike taxes on active income which are typically deducted straight from a person’s paycheck, taxes due on passive income are not automatically deducted, and if a person is not making quarterly payments to the IRS, the end of year tax bill could be significant. Tax credits are one way that those with passive income can minimize their annual tax burden, and avoid penalties and interest from failure to make quarterly payments. Federal Tax Credit Programs (including the Historic Rehabilitation Tax Credit and Investment Tax Credit) generate tax credits which can be used to offset passive income. Unlike State tax credits, the IRS mandates that Federal Tax Credits cannot be transferred, therefore they cannot be “sold”. They can however, be utilized by investors in a carefully structured transaction. Investing in Federal Tax Credit generating projects is a great option for people to offset their annual tax obligation. Take for example an individual, who has $100, 000 in passive income tax. If they invest cash, say $80,000, into a project which has generated $100,000 in Investment Tax Credits, the investor can then use the $100,000 tax credit to pay their income taxes due on passive income, and in doing so, realizes a savings of $20,000, or 20%. In transactions which generate cash, there are depreciation benefits which can offset the cash returns and further assist in making these transactions a financially astute tax planning and income generating tool. While this example is certainly oversimplified, it serves to demonstrate the basic way in which persons with passive income can save on the money owed to the IRS by investing in Federal Tax Credit projects.