Legal Definitions - assignment of income

Assignment of income refers to a legal principle, primarily in tax law, that addresses attempts to transfer the right to receive future income from one party to another. While an individual might direct their income to be paid directly to someone else, the law generally holds that the person who *earned* the income or *owns the asset that produced* the income is still considered to have received it for tax purposes. This means they remain responsible for paying taxes on that income, even if they never physically possessed the funds. The core idea is that income cannot be separated from its source for tax purposes.

Here are some examples illustrating the concept of assignment of income:

• Example 1: Professional Services

  A highly skilled consultant completes a project for a client, earning a substantial fee. Instead of receiving the payment herself, she instructs the client to pay her adult child directly, hoping to reduce her own taxable income. Under the principle of assignment of income, the consultant is the one who performed the services and earned the income. Therefore, even though her child receives the money, the consultant would still be considered to have received that income for tax purposes and would be liable for the taxes on it.

• Example 2: Rental Property Income

  A property owner rents out a commercial building. For a specific quarter, he tells his tenant to pay the rent directly to his business partner to settle a personal debt. The property owner is the legal owner of the rental property, which is the source of the rental income. By directing the tenant to pay his business partner, he is attempting to assign that income. However, because he remains the owner of the property generating the income, the rental income would still be attributed to him for tax purposes, and he would be responsible for paying taxes on it.

• Example 3: Investment Dividends

  An individual owns shares in a company that regularly pays dividends. Before the next dividend payment, she attempts to assign her right to receive those dividends to her sibling for the upcoming year, without transferring ownership of the actual shares. Since she retains ownership of the shares (the "tree" that produces the "fruit" of dividends), she is still considered the source of that income. Consequently, the dividend income would still be taxable to her, even though her sibling might physically receive the funds.