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By Staff Reporters
Sponsor: http://www.MarcinkoAssociates.com
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“Phantom Tax” or “Phantom Income” for direct owners of Treasury inflation-protected securities (TIPS) TIPS adjust their principal values and interest payments for inflation. As with other directly owned Treasury securities, TIPS principal, including the inflation adjustments, is not paid back to investors until the securities mature.
However, the principal adjustments are taxed by the IRS as income in the year in which they occur, even though no actual payments are made in those years to investors who own TIPS directly. This is why this income is called “phantom income” and the tax on it is known as the “phantom tax.”
Investors can avoid the phantom income/tax issue for TIPS by holding TIPS in tax-deferred retirement accounts. Mutual funds and Exchange Traded Funds (ETFs) typically take the “phantom” factor out of TIPS ownership by distributing the principal adjustments as taxable dividends.
As with direct ownership of TIPS, the tax consequences of these distributions by mutual funds and ETFs can be reduced by holding TIPS-owning instruments in tax-deferred retirement accounts
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Filed under: "Ask-an-Advisor", Accounting, Funding Basics, Glossary Terms, Investing, Marcinko Associates, Taxation | Tagged: dividends, ETF, ETFs, finance, Income, Marcinko, personal-finance, phantom income, phantom tax, tax, tax planning, taxes, TIPs, Treasury inflation-protected securities | Leave a comment »
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