In the wide landscape of various types of taxes, Phantom tax is very complex and hard to understand leaving many taxpayers scratching their head. Investors have to pay several types of taxes, but the concept Phantom tax is different form others as it is the amount of tax levied on the income or gain that has not withdrawn in the form of cash or physical assets. So, it is pretty challenging to understand and calculate for any tax payer, but leaves significant impact on their tax liabilities.
In this comprehensive blog we will explain What Does Phantom Tax Mean and how it works. So, let’ get ino it.
What is Phantom Income
Understanding Phantom Income is pretty difficult, still we are explaining in a simplified way. Phantom Income is the amount of income that has not been received yet in the form of cash , but one have to pay tax for this financial gain. It arises on the investment gains that have not been sold or distributed to the investor.
The phantom income is also calculated with the number of business types and differen situations including debt forgiveness, certain benefits and owners of limited corporations (LLCs) or S corporations.
By creating tax liabilities, Phantom tax complicates your tax processing as you are paying the tax that you have not receive yet.
Assessing Phantom gains might be difficult as the losses are not visible on the ground
Some Examples of Phantom Income
Here we have explaind some common examples to let you understand the Phantom Tax Meaning
- Unexpetced gains: The stock marlet prices are fluctuating continuously, so when an investor bought a stock whose value appreciates over time, they will gain profit which is unexpected income of the investor. However, the gain is not fixed until the stock is sold, still the IRS (Internal Revenue Service) impose taxes on these unexpected gains to the investors creating a debt on them.
- Depreciation in Real Estate: With the fluctuating price of the Real estate, the property owner are allowed to claim the depreciation expense for settlement of their income on which tax is imposed. In this situation the property owner have to pay a taxes on phantom income weven when they have not received any actual income or cash from the real estate.
- Zero Coupon Bonds: There are some bonds issued at a discount and get their proper values on maturity and the interests amounts are payable to the taxpayers account annually. The taxpayers have to pay tax on them evenwithout receiving te cash in their account that is the Phantom tax, taxapayers ahev to pay without the ral income.
- Mutual Funds & dividends: The taxpayers are liable to pay Phantom tax, if they have invested in mutual funds as the distribution of capital gains and dividends are considered as the phantom income even without receiving cash in their account.
Wrap Up:
Henceforth, Phantom incomes are the financial gain that has not received in real, still it is subjeted to pay tax on that income. However, Phantom tax doesn’t occur more often, still it happens when you are going to reinvest your profit into your business.
