With the end of 2019 approaching, we frequently receive questions about income split between different years.
“My church is paying for my moving expenses. They gave me a two checks for $1,000. Can I wait to cash one or both until January 1st so the payments go on next year’s tax return?”
“My Church was supposed to pay me a bonus, but I didn’t actually get it until January. Do I report it in 2019 or in 2020?”
Income can be a little confusing when it falls between two years, so IRS uses something called “constructively received income” to resolve these issues. It sounds very technical, but in a nutshell:
- Most individuals are treated under the cash method of accounting for their 1040 returns.
- Under the cash method of accounting, you must report income when you receive it OR when “constructively” receive it.
- Constructive receipt is when an amount is credited to your account or made available to you without restriction.
Here’s a simple example: If you receive a check that is immediately cashable in 2019, but you wait until 2020 to cash it, you still have to report it in 2019. You constructively received the money, because you had access to it without restrictions. Your employer would also report the money as paid to you in 2019, even if you didn’t get around to cashing the check until 2020. On the other hand, if your Church gives you a bonus for 2019, but you don’t actually receive the payment until January of 2020, you would have to report that income on the 2020 return.
You can read more about “Constructively Received Income” in IRS Publication 538, found at https://www.irs.gov/pub/irs-pdf/p538.pdf.
If you want advice regarding a unique payment situation, Clergy Financial Resources is there for you! Visit our website at https://www.clergytaxnet.com/resources/proadvisor/ today to schedule a Pro Advisor meeting.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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