Phantom Income

AAA

DEFINITION of 'Phantom Income'

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.

INVESTOPEDIA EXPLAINS '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. Income

    Money that an individual or business receives in exchange for ...
  2. Income Inequality

    The unequal distribution of household or individual income across ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Negative Income Tax - NIT

    A guaranteed minimum income plan advocated by economist Milton ...
  6. Exemption

    A deduction allowed by law to reduce the amount of income that ...
RELATED FAQS
  1. What's the difference between bills, notes and bonds?

    Treasury bills (T-Bills), notes and bonds are marketable securities the U.S. government sells in order to pay off maturing ... Read Full Answer >>
  2. If I roll my annuity into an IRA and receive after-tax distributions, will this be ...

    Distributions of after-tax amounts (amounts already taxed) will not be taxable when distributed to you. However, you will ... Read Full Answer >>
  3. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Full Answer >>
  4. What is a stripped bond?

    The quick answer to this question is that a stripped bond is a bond that has had its main components broken up into a zero-coupon ... Read Full Answer >>
  5. Are long-term U.S. government bonds risk-free?

    For any debt obligation to be considered completely risk-free, investors must have full faith that the principal and interest ... Read Full Answer >>
Related Articles
  1. Taxes

    10 Money-Saving Year-End Tax Tips

    Getting organized well before the deadline will curb your frustration and your tax liability.
  2. Bonds & Fixed Income

    Use Duration And Convexity To Measure Bond Risk

    Find out how this measure can help fixed-income investors manage their portfolios.
  3. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  4. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  5. Stock Analysis

    What Makes LinnCo Different From MLPs?

    MLPs are some of the favorite investments of dividend investors, as the surge in the energy industry increased the amount of income that MLPs paid out to.
  6. Investing

    What's a Transfer Price?

    A transfer price is what one unit of a business charges another unit of the same business for a good or service. The transfer price is usually close to the prevailing market rate when different ...
  7. Investing

    Who are Stakeholders?

    “Stakeholder” is used in commerce to describe any party who has an interest in a business or enterprise. Traditionally, stakeholders in a corporation are shareholders, employees, customers and ...
  8. Economics

    Afraid Of A New Financial Crisis?

    It may be time for the U.S. to adopt a model for financial companies that better deters risky financial behavior.
  9. Investing

    What's a Subsidiary?

    A subsidiary is a corporation owned 50% or more by another corporation. The owning corporation is usually called the parent or holding company. A company that is 100% owned and controlled by ...
  10. Investing

    What's a Divestiture?

    Divestiture is when a company, government or other organization sells, shuts down or otherwise eliminates a division or operating unit. Divestitures happen for many reasons. Management may decide ...

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center