Question

Fred is a full-time teacher. He has written a book and receives royalties from it. Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son, Fred. This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support. Does Fred need to include the amount of the royalty check in his gross income?

1) Yes, because the royalty check is considered part of Fred's income
2) No, because Fred directed the publisher to make the check payable to Mabel
3) Cannot be determined
4) Not applicable

Answer 1

Fred must include the royalty check in his gross income because it is considered part of his income, regardless of directing the publisher to make the check payable to his mother. The action of giving his mother the money is considered a gift, which doesn't change the fact that the income was originally his.

Step-by-step explanation:

The question asks whether or not Fred should include the amount of the royalty check in his gross income after he has directed the publisher to make the check payable to his mother, Mabel. The correct answer is: 1) Yes, because the royalty check is considered part of Fred's income. Even if Fred directed the payment to his mother, the royalties are resultant from his work and thereby originally accrued to him. This situation is akin to giving a gift, and does not transfer the tax liability associated with the income. For tax purposes, the income is earned by Fred and is then considered gifted to his mother, Mabel, which may subject him to gift tax regulations depending on the amount, but does not relieve him of including it as part of his gross income. Income taxes are generally based on the individual earning the income, and income cannot be reassigned simply by redirecting the payment to another person.