Constructive receipt
From Wikicpa
Constructive receipt is the tax law doctrine that says that income is taxed to you before it's actually received if it is credited to you, set aside for you, or made available to you so that you can draw on it at any time. However, there is no constructive receipt of income if your control of it is subject to substantial limitations or restrictions. <Treas. Reg. 1.451-2(a)>
Overview
Determination of whether or not income has been constructively received is made on a factual basis. Slight differences in facts require the tax professional to examine a case carefully before using it as a precedent. Constructive receipt requires an unqualified vested right to receive income--there can be no condition, limitation, or restriction that prevents the taxpayer from having unrestricted access to his or her money without penalty. The taxpayer, however, can't waive a present right to receive income--in other words, the taxpayer may not "turn his back" on income that is already earned. But if the taxpayer requests deferral of payment prior to receiving an unqualified vested right to income, constructive receipt doesn't occur.
IRS Frequently asked question
In what tax year is income reported? Does it matter when I receive the check ? Does it matter when I earned the money?
The proper year for reporting income depends on your method of accounting (cash or accrual). The majority of taxpayers filing Form 1040 use the cash method of accounting. Cash method taxpayers report the items of income in the year in which the income was actually or constructively received. For cash method taxpayers, the year that the income is earned is irrelevant.
With respect to "actual receipt," if you receive an item of income that is paid to you by check, your receipt of that check is taxable to you as if it were cash.
With respect to "constructive receipt," constructive receipt occurs when the income is made available to you. For example, you are in constructive receipt of income paid to you by check if the check has been cut and is readily available to you, even though you have not picked it up as planned. Also, you are in constructive receipt of bank interest when it has been credited to your account, even though you have not withdrawn it.
If you are filing Form 1040, it is unlikely that you are an accrual method taxpayer. Nevertheless taxpayers who use the accrual method generally report income in the year it is earned, billed, or received, whichever occurs first.
