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December 2017 Tip of the Month

Let’s Talk About Phantom Income

Last week, Marty Abo taught at the Judicial College, an annual three day conference attended by substantially all of New Jersey’s judges.  The lecture was entitled “Phantom Income - Taxable Income With or Without the Actual Cash”

Attached to this alert we’ve included “Abo’s Hit-list of Taxable Income Items” which should give you a virtual checklist of things you can easily keep an eye out for - things you must keep an eye out for.

Marty tried to illustrate how taxable income is more than just the numbers on a paycheck or a W-2.  He stressed that it's a complicated series of sources that come together - and, if NOT correctly dealt with or at least considered, it can create major and lasting problems for any individual, the Judge, an attorney, as well the clients they represent. Armed with the knowledge of what “phantom income” really is and the unsuspected items that might be included in income, one should be prepared to address issues BEFORE they turn into problems. We’ve also attached the other handout from our favorite client Mr. Tax E. Vader and his wife, Mrs. Ima E. Vader illustrating the significant difference between items reflected on the income tax return and true disposable or economic income.

Marty’s goal in preparing “Abo’s Hitlist” was for you to walk away with strategies to purposely address the obvious and not-so-obvious income issues of clients (or yourself) learning how to handle taxable income that can generate tax, even without the actual cash to pay the tax (you gotta be kidding, right?). 

What exactly is “phantom income”?  Well, we consider it income that is taxed to you during the year that is not actually received by you in that year. For example, phantom income might manifest itself in partnerships, S corporations or even sole proprietorships where the earnings are taxed but not received.  Or how about a zero-coupon bond where interest is merely credited to you as the taxpayer but no check is actually cut? 

Soooo…take a look at the following list.  Some of the items may very well create “phantom income” while others may not.  If you see an item that you don’t understand, ask your accountant.  Still not sure?  Give us a call at Abo and Company / Abo Cipolla Financial Forensics.