Assignment of income allows you to assign part of your income directly to another person. While there are several valid reasons to assign your income to someone else, many taxpayers mistakenly believe that it can help lower their taxable income. While assignment of income allows you to divert income, you cannot divert taxes.
In this article, we’ll provide some examples of failed attempts at avoiding income taxes through the assignment of income and the valid reasons someone might want to assign income to someone else.
You Can’t Use Assignment of Income to Avoid Paying Taxes
The assignment of income doctrine states that the taxpayer who earns the income must pay the tax on that income, even if he gave the right to collect the income to another person.
The doctrine is quite clear: taxpayers must pay their own taxes. However, that doesn’t stop many people from thinking they can avoid paying taxes or minimize their taxable income through the assignment of income.
Here are a few scenarios we commonly see.
- High-Earning Individuals: In an attempt to avoid having to pay the higher tax rates on their substantial income, high-earning individuals sometimes try to divert income to a lower-income family member in a significantly lower tax bracket. The assignment of income doctrine prevents this scheme from working.
- Charitable Donating: Even if a taxpayer assigns part of their income to a charitable organization, they will still have to pay the taxes. However, they might be eligible to claim a deduction for donations to charity while building some good karma by helping others in need.
- Owning Multiple Businesses: A taxpayer who controls multiple businesses might try to divert income from one business to another, especially if one has the potential to receive a tax benefit but requires a higher income to do so. Not only is this illegal, but it also will not lower the taxable income of the business.
You Can Use Assignment of Income to… Assign Your Income
The assignment of income doctrine does not stop you from diverting part of your income to someone else. In fact, that’s the whole point! Maybe you’re helping to support an elderly family member, or you consistently donate to the same charity every month or year. Whatever the case, you can assign the desired amount of your income to go to another person or organization.
While there are no tax benefits involved in assigning income versus making traditional payments or donations, it can be a more convenient option if you’re making regular payments throughout the year.
S.H. Block Tax Services Provides Clear Answers For Complicated Questions
If you have any questions about how to go about assigning part of your income to a family member in need or a separate business entity, please contact S.H. Block Tax Services today. We can answer all of your questions and address all of your concerns regarding the assignment of income and provide suggestions on valid and legal ways to save on your taxes.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.