FEBRUARY 28, 2015

FAVORED INCOME

How we think about types of income depends upon our age and our circumstances.

If we are very young children under the care of one or more adults, it is likely that we have no concept of income or of expense. Whether we feel good or feel bad is more likely the primary focus of our attention.

If we are elderly, no longer able to care for ourselves, and unable to communicate with others, our primary focus is probably the same: Do we feel good or bad? Are we warm or cold? Are we hungry or satisfied?

If any are currently the owners of significant wealth that may provide one with whatever income is needed for however long one may live, things are different. Then one's focus may wander to whatever goal one wishes to achieve or to whatever experience one may wish to have. Barring national economic calamity, having great wealth almost guarantees that the cost of expenses will generally be no issue: The wealthy will always have enough income or proceeds from sold assets to pay for whatever is wanted or needed.

However, for the vast majority any adverse issues over incomes and expenses are matters of great importance. The need for sufficient income to pay on-going expenses is a constant concern. Every effort must be expended to avoid the discomfort, pain, suffering, chance of personal bankruptcy and in really rough times the homelessness that may come from having little or no income or personal wealth.

Fear is sometimes said to be one of the great drivers motivating individual action and accomplishment. The desire for extraordinary personal recognition and the deference that such notoriety brings from one's peers may be another. Often cited as the third rail of motivation: the unrelenting desire to have an ever bigger share of whatever is associated with prominence, with exquisite living, and with highly acclaimed renown.

However that may be, few would disagree that having wealth or income ( or both ) is indeed a necessity if one hopes to travel from birth to death without facing the harshest realities of life on earth. Since only a small number have magnificent wealth, the effort is continually being made by millions and millions of people to find, to have, and to keep a continuing flow of cash income.

Income most frequently falls into one of two clearly marked buckets:

Earned Income and Unearned Income.
Earned income includes employee compensation and net income from self-employment.

Unearned income includes anything else that increases your wealth or decreases your expenses without any requirement for you to directly perform work.

In the United States most homeowners with a home mortgage itemize deductions on their Federal tax returns. Most renters do not. For homeowners who pay at the highest tax rate itemizing deductions may save them from paying between $7,000 and $10,000 of taxes each year. This is a magnificent amount of unearned income each year by anyone's estimate.

If one is able to choose between types of income, unearned income is clearly favored income.