Constructive receipt

What is a constructive receipt?

We all understand how important it is to claim all income on our tax returns. One of the challenges faced is when you have not taken constructive receipt of income due you. Constructive receipt is when you have unfettered access to funds with no restrictions. Therefore, if funds are available to you by Dec. 31 of the tax year, you must claim the funds on your tax return.

Deeper definition

Constructive receipt of funds occurs as soon as money is credited to your account. Since most taxpayers use a cash method of accounting for income, they must account for all amounts paid to them before Dec. 31.

When you can access the funds, by requesting them, writing a check out to use the funds, requesting a cashier’s check for the funds or having physical possession of the funds, it is considered constructive receipt.

Constructive receipt example

There are several instances where constructive receipt can impact your taxable income. For example, if your company pays an annual bonus as a fringe benefit and it is paid on Dec. 29, the income is taxable during the year received.

You cannot move the funds over to the next tax year to stay in the lower tax bracket. There are other instances where constructive receipt applies.

Another example is if you have stocks, the company declares a dividend on Dec. 24, but the ordinary dividends are not being paid until Jan. 10, then you do not have constructive receipt of the funds. Therefore, you would not pay taxes on them until the following year.

It is important to track income such as rent, company bonuses, dividends and capital gains so that they are accurately reported on your taxes. If you have control over the funds before the last day of the tax year, you have taken constructive receipt of the funds, and those funds have an impact on your taxes.

Use the Bankrate marginal tax rate calculator to get an estimate of your annual tax rate based on income.