You know you have to report all income on your tax return, but sometimes there is ambiguity regarding exactly when that income was received. That can make it hard to determine which tax year to apply the income to.
Here’s what you need to know to make sure that income is correctly reported.
If you’re a cash-basis taxpayer (and the majority of taxpayers are), you pay tax on income in the year it is received. Income is considered “received” when it is available to you without any substantial restrictions. This is called “constructive receipt.” So, for example, if you get a check in late 2016 but don’t deposit it until January 2017, that check is still considered income for 2016. That’s because nothing was stopping you from accessing that money in 2016; you simply chose not to deposit the check until later.
Knowing the concept of constructive receipt, it should be easy to determine what year a particular part of your income was received, and then you can file your tax return accordingly.
Still have questions? Dealing with problems stemming from previously reporting income in the wrong year? Taxation Solutions, Inc. is available to help. Simply give us a call today to get started with your free initial consultation!