[GNC] When income is not income

[David Cousens]

Stan,

You seem to be thinking of basis as in "tax basis", but there is a more
general accounting meaning.  

The basis of an asset as Michael pointed out will initially be its cost
of purchase together with any additions to its value. 

I have a similar annuity purchase with some of my my superannuation in
Australia, however it is not taxable (it was purchased with funds which
had already been taxed). The investment income from the capital is
taxed in the hands of the annuity provider (a superannuation fund) who
also takes out management fees and the remaining income is added to the
fund (an increase in the basis of the fund) and I pay no income tax on
the income to me from the annuity. I am required by the taxation
legislation under which the fund is setup, to draw down on the fund at
a specific minimum monthly rate and I can choose to draw down at a
higher rate if I wish. Any remaining capital in the fund at my death
becomes a part of my estate and if the fund is depleted before my
death, then I receive no more payments. This fund is not part of my tax
basis and the income I receive from it is classified as non-taxable.

I have a couple of other superannuation and pension income streams
which are taxable as their basis was accumulated from my income before
taxation (i.e. it was not included in my taxable income at the time it
was paid into the superannuation fund).

On Wed, 2025-07-02 at 12:41 -0700, Stan Brown (using GC 4.14) wrote:
> 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
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