Sometimes, people choose to assign their income to another person. This could be arranged by directing your employer to send your income to a third-party. However, under the “assignment of income doctrine,” you cannot avoid taxes by assigning your income to a third-party. The purpose of this rule is to avoid tax evasion.
How is Assigned Income Taxed?
For income tax purposes, if you receive income from working and assign it to someone else, it will not be taxed to that third-party who received the assigned income. Instead, you will be taxed because you earned the income.
The same applies for income that you receive from property, such as with stock dividends or income received from renting out properties. Income is taxed to the person who owns the income-producing property.
Thus, if you own the property that generated the income, you will be liable for the taxes on the resulting income. However, if you give away the income-producing property, you will not be taxed on the income once you have surrendered complete control over the income-producing property. To clarify this point, consider the following scenario:
If you own and rent a house for $1,000/month, the monthly rent payments will be considered income that you earned. If you assign this income to your mother, you will still be taxed on the income. However, if you transfer the title of the house to your mother and surrender control over the rental property, you will not be taxed on any rental payments received because you no longer own the income-producing property.
Are There Any Exceptions?
There is an exception to the general rule regarding taxing assigned income when dealing with a principal-agent relationship. If an agent receives income from a third-party that is intended for the principal, the income is generally not taxable to the agent but instead will be taxable to the principal.
For example, if a salesman receives money from a customer in exchange for goods that he is selling on behalf of a company, the company would be the entity that would be taxed on that money. Even though the income may appear to have been earned by the agent, the resulting income is still taxed to the principal since the agent is simply collecting income for the principal.
Should I Consult with an Attorney?
If you have any questions about whether income you earned is taxable to you, contacting an accountant would be in your best interest. However, if you are facing penalties from the IRS over assigned income then you should contact a local tax attorney to understand your circumstances and the best choice for you to avoid further trouble.