What is the taxation of passive income?
Passive income is typically taxed differently than active income. In Indiana, passive income is taxable if it’s earned through or constructed from certain types of activities, such as rental activities, efforts by a non-resident investor, and certain services normally performed in a business setting. Taxes on passive income are calculated with Form IT-40PNR, which is the Indiana Part-Year Resident and Nonresident Income Tax Return. This form is used to report both active and passive income earned and must be filled out for the entire year in which the income was earned. Passive income is treated differently than active income because taxpayers don’t exercise the same level of control over the income earned from passive activities. By taxing passive income at a higher rate, the government incentivizes taxpayers to invest in active business activities that benefit the economy. In Indiana, the tax on passive income is calculated according to the taxpayer’s total income, filing status, and number of dependents. The tax rate can vary based on the taxpayer’s situation, ranging from a flat rate of three percent up to a top rate of three point four percent. Taxpayers should keep in mind that the taxes on passive income must be reported and paid before the income is spent. Paying taxes on passive income in a timely manner helps taxpayers avoid additional penalties and fees.
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