Taxable Income But No Cash? What To Tell IRS


What items are taxable? It's easy to remember wages, since you receive a Form W-2. It's also easy to remember income reported on Forms 1099, although if you are missing one, maybe not so much. Yet a variety of events can give you taxable income even though you’ve seen no cash. Constructive receipt requires you to pay tax when you merely have a right to payment, even though you do not actually receive it. If you have a legal right to a payment but elect not to receive it, the IRS can still tax you. The classic example is a bonus check. Suppose your employer tries to hand it to you at year end, but you insist you’d rather receive it in January, thinking you can postpone the taxes.

Because you had the right to receive it in December, it is taxable then, even though you might not actually pick it up until January. On the other hand, if your company actually agrees to delay the payment (and actually pays it to you and reports it on its own taxes as paid in January) you would probably be successful in putting off recognition of the income until the next year. Yet even in this circumstance, the IRS might contend you had the right to receive it in the earlier year.

The IRS does its best to ferret out constructive-receipt issues, and disputes about such items do occur. The situation would be quite different if you negotiated for deferred payments before you provided the services. For example, suppose you are a consultant and contract to provide personal services in 2015 with the understanding that you will complete all of the services in 2015, but will not be paid until Feb. 1, 2016. Is there constructive receipt? No. In general, you can do this kind of tax deferral planning as long as you negotiate for it up front and have not yet performed the work.

Some of the biggest misconceptions about constructive receipt involve conditions. Say you are selling your watch collection, and a buyer offers you $100,000, even holding out the check. Is this constructive receipt? No, unless you part with the watch collection. If you simply refuse the offer–even if your refusal is purely tax-motivated because you don’t want to sell the watch collection until January–that will be effective for tax purposes.

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