Annual Update · Passive Income

Taxable Passive Income – 2020

I haven’t filed my taxes yet for 2020. I’m probably going to file for an extension to increase the window of any possible eligibility for stimulus payments. It’s highly likely that I still won’t be eligible, but it’s worth a shot. It’ll be my first time filing for an extension, so there’s some learning ahead. I now have until May 17th to make my decision.

I’ve already done most of my tax calculations for 2020 and I decided to examine my taxable, passive income sources, i.e. sources not directly connected to my W2 income, aka my “unearned” income. If I can get my passive income to exceed my expenses burn rate, I’ll consider myself financially independent.

Let’s dive right in.

Bank Interest: $230 (-72% from 2019, $825.21)

Despite having higher average balances across my savings and checking accounts during 2020, I earned a fraction of the interest that I did in 2019 ($825.21). Not surprising given the global pandemic and near-zero interest rates. I suspect 2021 will continue to see low interest rates.

Bank Signup Bonuses: $1,170 (+95% from 2019, $600)

Despite my goal of simplifying my financial picture and reducing the number of financial accounts I had open, I opened three new bank accounts in 2020 to score signup bonuses: HSBC, SunTrust and M&T Bank. 

Frankly, I’m not sure it’s worth the hassle. The “game” involves changing up direct deposit, holding largish account balances for a few months, and triple checking fine print to avoid the fees. One bank required me to physically sign and mail an account closure request to them. The 90s called and they want their snail mail back! I also suspect the multiple bank accounts affected my credit report negatively, impacting my car insurance quote. But that’s another blog post.

I expect my bank signup bonus income to be significantly lower in 2021 as I reel this in. Of course, I said that last year, too!

Unusual Interest: $2,020

I bought some Series I Bonds through Treasury Direct in 2011 and 2013. To simplify my financial picture, I closed bonds out in January 2020. All of the interest is credited to 2020. It’s exempt from state tax, but still subject to federal tax.

Pretty crazy that the interest gained from the bonds matched the year.

Ordinary Dividends: $1,226 (+10% from 2019, $1,114)
Qualified Dividends: $953 (+17% from 2019, $816)

All of my taxable assets that throw off dividends are at Vanguard. The ordinary bucket is so much higher than the qualified bucket because of a relatively high portion allocated to ETFs with foreign holdings.

Selling Covered Calls: $4,416 (+338% from 2019, $1,008)

As part of my strategy to “option myself” out of my DumpsterFire, Inc., holdings, I did quite well collecting premiums and watching them expire through 2020. Given that I eliminated over 50% of my position in DFI, I don’t expect to see nearly as much covered call income in 2021.

Trading Securities: -$4,351 (-1,330% from 2019, $-304)

Last March, I churned some of my portfolio to feed my tax loss harvesting system. Because I was able to immediately buy other index ETFs that tracked different, but highly correlated indices, I also rode the securities back up, making these mostly paper losses. To sweeten things further, my charitable giving system enables me to gift those appreciated shares once I’ve held them for the year, translating to paying zero taxes on the gain but getting the full value of the loss.

For 2020, you’ll notice that my trading losses mostly cancel out my covered call profits. It looks like I mostly stood still. But keep in mind that I scored capital gains that I can realize in the future (or not if I use it for my charitable donations), coming out ahead in future years.

Net Passive Income for 2020: $5,664 (+40% from 2019, $4,059)

My marginal tax rate is 24%. Combine that with a state tax rate of 5.75% and the qualified dividend rate of 15%, the total tax is $1,599 on my passive income.

Honorable Mentions

The following aren’t sources of passive income, but instead strategies I employed to reduce my taxes, ultimately having a positive impact on my net worth. But they generally fit into the “spend some to save some” category.

Bunching Charitable Contributions: By bunching two years’ worth of charitable contributions into one, I can take advantage of the difference between my standard deduction and my itemized deductions. In 2020, that difference was $4,857, for a savings of $1,166 of taxes. However, bunching my contributions bumped me into the 24% tax bracket, so the savings is more like $1,069.

529 Contributions: I dumped $22k into 529 accounts during 2020, withdrawing over $8k to pay college expenses. While my 529 contributsion have no immediate federal tax benefit, they did save me $1,265 in state taxes. And this doesn’t include appreciation, which wasn’t nearly as much, but not insignificant. I expect to have even more state tax savings in 2021.

Conclusion

My passive income is far from exceeding my burn rate. Actually, it’s not even close. Housing, feeding, clothing, and paying tuition for six children is not trivial. But that’s a post for another day.

How was your passive income during 2020? Any thoughts or advice you’d give me as I look at 2021 and the future? I’d love to hear them in the comments.

Hasta luego!

8 thoughts on “Taxable Passive Income – 2020

  1. I also tried selling covered calls this year. Some issues I faced:

    1) Just got assigned on a call I sold. I am OK selling at the strike price but trying to juice my returns are turning into a $15k long term capital gain for cash that I don’t need. Also, I now need to deal with the income tax (I’ll adjust my W-2 withholding). Part of me wanted to continue this earnings flow but I don’t want to get back in on this stock at current prices.

    2) Selling covered calls are taking more “work” than I was hoping in order to get a good price. I’m finding making this strategy works really depends on the stock. Some call options fetch lousy prices and a limited market. I’m finding you need to pick the right stock and actively shop in order to get decent prices.

    1. 1) Same issue here. I’ll adjust my W-2 withholding later in the year when I have a better guestimate of bonus income and other gains picked up during the year.
      2) I think I lucked out with DumpsterFire Inc. There’s enough volatility that premiums can be pretty high, even just two or three months out. For example, today DFI is trading at $20 and June18/$24 calls are $.62. I actually sold some at $1.14 at beginning of March. I’m not terribly experienced, but that seems like a pretty steep theta. A 52-week low of $9 and high of $25 will do that. I suspect my calls will expire out of the money, and I’ll repeat it in June.

  2. Funny, I literally made a “taxable investment income” google spreadsheet on March 28th.

    $25 interest, $4,288 dividends, $11,229 capital gains for a total of $15,542. Looks like that would cover about 32% of our “expense burn rate” as you call it. I didn’t harvest much in March as this was a year of moving some stuff around.

    I am a little unclear how bunching contributions could bump you up a bracket? If anything, doesn’t it lower your taxable income or am I not thinking about it correctly?

    Have a good Saturday.

    Max

    1. Thanks for the question. Without bunching my contributions, my taxable income is towards the very top of the 22% tax bracket. On years that I donate the bunched up contribution, my taxable income drops deeper into the 22% bracket. However, on the off years, not contributing bumps my taxable income the other way, crossing slightly into the 24% bracket. I’m saving by having a larger total deduction across the years, but my off year ends up with slightly higher tax than it would otherwise.

      Let me know if that doesn’t make sense.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.