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The effect of constructive receipt on income taxes

Minnesota residents know that they have to report wage income on their tax returns. Typically, income is reported on a W-2 or a Form 1099. However, there are other forms of income that may need to be reported even if no cash is involved. The concept of constructive receipt says that an individual must report income when he or she has the right to receive it.

For instance, an employee may ask that an employer give him or her a yearly bonus in January as opposed to December. However, since the employee had the right to collect the money in December, it would need to be reported on that year’s tax return. An exception may be available in the event that the employer delays the payment until the following year. However, the IRS may still make a constructive receipt claim in such a scenario.

Constructive receipt may not apply if a person negotiates to have payments deferred. This may allow an individual to render services now and defer payment and tax payments until the following year. It may also not apply if payment is dependent on title to an item being transferred to another party. For instance, if someone offers to sell assets to another person, the income is reported in the year in which the transaction is completed.

Those who are having tax issues may want to talk with an attorney who has experience with these types of matters. Legal counsel might be able to take steps that may postpone future IRS collection actions such as a wage garnishment or an asset seizure.

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