Q: In a recent response you said, “Your income will be taxed in the year in which it is constructively received.” What does that mean? If I retire on Dec. 31, 2010, and receive my last paycheck in January, which will include my lump-sum payment for terminal annual leave, isn’t that money taxed as income received in 2011? Will it not be shown as income on the W-2 for 2011, not 2010?
A: It is not unusual for an employer to include income on the W-2 or 1099 for the year in which it was paid, even though the income was not received until the following year. Typically, people include the income on their returns as it is reported by their employer. Since individual taxpayers are taxed on a cash basis, however, they may elect to report the income in the year in which it was constructively received — when the money was made available to them, regardless of when they actually took it. For example, if a check is handed to you on Dec. 31, you have constructively received the payment at that time, even if you elect not to cash the check until Jan. 3 of the following year.