Phantom Income

What is 'Phantom Income'

Phantom income is income paid to a taxpayer during the tax year that is not constructively received at the taxpayer's end. Phantom income is not terribly common, but does manifest itself in such investments as limited partnerships, where the earnings are taxed but not received, and zero-coupon bonds, which are issued at a discount and mature at par. The interest payments for zeros are credited to the taxpayer but no check is actually cut for them. The bondholder effectively receives the payments at maturity, when the bond is redeemed at the higher par value.

BREAKING DOWN 'Phantom Income'

Loan forgiveness is another form of Phantom Income. The creditor essentially "pays" the delinquent borrower the amount of debt forgiven, which is why creditors send Form 1099-C to the borrow showing the amount of "income" that he or she received as forgiven debt. For obvious reasons, Phantom Income is something most taxpayers generally tend to eschew if at all possible. Unfortunately, Phantom Income is unavoidable in some cases.

RELATED TERMS
  1. Phantom Gain

    A situation that arises when a gain on an investment is offset ...
  2. Phantom Stock Plan

    An employee benefit plan that gives selected employees (senior ...
  3. Constructive Receipt

    A tax term mandating that a taxpayer is liable for income, which ...
  4. Earned Income Credit - EIC

    A tax credit in the United States which benefits certain taxpayers ...
  5. IRS Publication 538

    A document published by the Internal Revenue Service (IRS) that ...
  6. Phase Out

    1. The gradual reduction of a tax credit as a taxpayer approaches ...
Related Articles
  1. Bonds & Fixed Income

    Explaining Original Issue Discount

    An original issue discount is the amount below par at which a bond or other debt instrument is issued.
  2. Savings

    All About Income

    Income is the money you or a business earns by providing goods or services, or through investments.
  3. Investing Basics

    What is Par Value?

    Par value is a term used for investments that means original value. It’s also called face value or nominal value.
  4. Bonds & Fixed Income

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  5. Your Clients

    Medicare: Reducing Income for the Right Reasons

    The higher your income the higher your surcharges on Medicare payments. Find ways to reduce income and reduce payments via insurance or annuity products.
  6. Taxes

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  7. Bonds & Fixed Income

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  8. Insurance

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  9. Bonds & Fixed Income

    Zero-Coupon Bond

    A zero-coupon bond or ‘no coupon’ bond is one that does not disburse regular interest payments. Instead, the investor buys the bond at a steep discount price; that is, at a price ...
  10. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
RELATED FAQS
  1. How does an investor make money on a zero coupon bond?

    Learn about investing in zero-coupon bonds, exactly how they work as an investment vehicle, and their advantages and disadvantages ... Read Answer >>
  2. Is the marginal tax rate a progressive tax?

    Learn how the marginal tax rate is a progressive tax that takes a higher percentage of income tax from high-income earners ... Read Answer >>
  3. What’s the difference between IRS Forms 1040 and 1040EZ?

    Though very similar, the differences between the 1040 and 1040EZ Forms are significant when it comes to filing your tax return. ... Read Answer >>
  4. What is the difference between a zero-coupon bond and a regular bond?

    The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest ... Read Answer >>
  5. If the price of the bond falls, does that mean the company won't pay me the par value?

    When you buy a bond, you are loaning money to the issuer. Because a bond is a loan, the interest paid to the bondholder is ... Read Answer >>
  6. What does tier 1 capital tell investors about a bank's operations?

    Learn about which financial instruments have par values and what this means about the market price of the most common of ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center