[GNC] When income is not income

[Stan Brown (using GC 4.14)]

On 2025-07-02 06:50, Michael or Penny Novack via gnucash-user wrote:
> 
> What you paid for the annuity is its basis as an asset. It is, however,
> a "conditional asset". The condition in this case your being alive.

I'm a little nervous about that word "basis". In terms of basis in an
IRA, I didn't have any basis in the traditional IRA that paid for the
annuity (so all distributions from that IRA are taxable), and since the
annuity itself is a Traditional IRA I don't have any basis in it either
(so all payments from the annuity are taxable).

Maybe "basis" has some other meaning I'm not familiar with? In any case,
if the annuity is an asset (which seems to be the general opinion), the
only starting valuation I can reasonably give it on my books is what I
paid for it.

> After your death, whoever is closing down your books, would be entering
> a "journal transaction" to reflect its "evaporation" << debit equity,
> credit annuity >>
> 
> When you receive income from this annuity, simply debit cash, credit
> income << the value/basis of the annuity is not decreased >>

Okay, that makes sense.

But ... at the end of the year I get a statement from New York Life
showing the Fair Market Value for RMD purposes. That FMV will, I think,
equal the year-earlier FMV, minus 12 months' payments, plus or minus
some gains or losses in asset value.

Would I make corresponding changes in the value of the annuity on my
books, or leave it at the amount I paid for it originally?

> Distributions from an IRA, 401k, etc. are very different. And whether
> that's taxable income depends on type of IRA, where you are in the
> history of distributions, etc. I think what has you confused is that the
> distribution is BOTH cash received, income, and reduction of the asset.
> In order to discuss handling THAT part of it we need to ask how are you
> carrying the IRA (as an asset) and how did it get there. BUT --- to
> start you off thinking in the right direction, the transaction might
> have FOUR accounts, debits to cash and equity, credits to income and
> IRA. << So it WAS an accounting question too >>

I'm guessing you refer to R Losey's example, which is also in
> https://lists.gnucash.org/pipermail/gnucash-user/2023-January/105013.html
I'm studying that article.

> Michael D Novack
> 
> 
> On 7/1/2025 5:41 PM, Stan Brown (using GC 4.14) wrote:
>> Disclosure:: (A) is an accounting question, not a GC question. I hope
>> some folks will find the question interesting enough to comment on
>> anyway. (B) is, I think, a GC question.
>>
>> (A) Annuity
>>
>> Last year I bought an annuity for a single payment of $P. I will receive
>> a fixed $M each month until I die. Regardless of when that happens,
>> there is no payout to any beneficiaries.
>>
>> I set this up as Assets:Investments:Annuity with an initial value of $P,
>> transferred directly from my traditional IRA.
>>      debit $P:  Assets:Investments:Annuity
>>      credit $P: Assets:Investments:Traditional_IRA
>> When I received the first payment last month, I did this:
>>      debit $M:  Assets:Checking Account
>>      credit $M: Assets:Investments:Annuity
>> But now I'm having second thoughts.
>>
>> This annuity isn't an investment like a mutual fund. While it has a
>> value, I can't touch that value ahead of the monthly schedule, and my
>> heirs (or creditors) get nothing. So I'm not sure that it makes any
>> sense to have it as an asset. Maybe I should have done this for the
>> purchase
>>      debit $P:  Expense:Annuity_purchase
>>      credit $P: Assets:Investments:Traditional_IRA
>> and this for each payment
>>      debit $M:  Assets:Checking Account
>>      credit $M: Income:Annuity_Payout
>> That would reduce my total assets and my net worth by $P, but I'm
>> getting uneasy about having included the annuity in Assets in the first
>> place.
>>
>> Comments?
>>
>> At least this has the virtue of including the annuity income in my
>> Income Statement. But that leads to another issue ...
>>
>> (B) IRA
>>
>> Right now withdrawals from my IRA are simple transfers:
>>      debit $X:  Assets:Checking Account
>>      credit $X: Assets:Traditional_IRA (same amount)
>> While I think that's the right thing from an accounting standpoint, it
>> has a drawback: the Income Statement doesn't show those withdrawals as
>> part of my income, even though the tax man treats them as income and
>> they should be in any statement I provide when applying for credit.
>>
>> Is there a way to eat my cake and have it? Maybe I could create an
>> account Income:IRA_Withdrawals and a contra account
>> Expense:IRA_Withdrawals_Contra. When making a withdrawal of $X I would
>> record the transaction in the previous paragraph and also this:
>>      credit $X: Income:IRA_Withdrawals
>>      debit $X:  Expense:IRA_Withdrawals_Contra
>> I could exclude the contra account from the income statement to produce
>> an Income Statement containing all my income that's subject to tax. But
>> this seems kind of rigmarolish, and I'm wondering whether there's a
>> better way.

Stan Brown
Tehachapi, CA, USA
https://BrownMath.com