Author Topic: Question for Tax Peoples - 2015 income attributable to 2014?  (Read 2813 times)

dragoncar

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Question for Tax Peoples - 2015 income attributable to 2014?
« on: March 04, 2015, 12:49:32 PM »
So my wife's employer screwed up and didn't pay her correctly for 2014.  They will be making up the difference in 2015, which means a check. 

As far as I know (I googled but didn't find anything), we just pay taxes as if this is 2015 income.

However, it was earned in 2014.  Does this matter for individuals?  I think it matters for other entities, but just want to make sure everything is on the up and up if we take the easy route and consider it 2015 income.  It might also be more advantageous as 2014 income for tax bracket/AMT purposes -- do we get a choice?

jmusic

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #1 on: March 04, 2015, 12:51:52 PM »
As far as I know (I googled but didn't find anything), we just pay taxes as if this is 2015 income.

I'm not an expert, but I'm 99% sure this is correct.

rocketman48097

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #2 on: March 04, 2015, 12:54:47 PM »
Taxes are done on the cash basis, it will be considered 2015 income.  My wife once received a class action legal settlement for 3k from like 5 years prior, and it was taxable for the year received, even though it was considered earned compensation (it was unexpected as well, a total windfall).

Cathy

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #3 on: March 04, 2015, 01:28:36 PM »
There are actually two separate issues.

The first issue is the method of accounting. Pursuant to 26 USC 446, taxes are to be computed "under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books". For almost all individuals, this is "the cash receipts and disbursements method" (commonly referred to as "cash basis" accounting). However, individuals are not actually required to use that accounting method. But let's assume you use that accounting method because almost everyone does.

Under the cash method, what matters is when you received the income, not when you earned it.

However, the discussion does not end there. The second issue is when you received the income.

Under any method of accounting, receipt of cash is not necessarily when the cash is physically available for you to spend. It could be earlier than that. Pursuant to 26 CFR 1.451-2, "Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions." (emphasis added)

In the situation in this thread, it sounds like the company was legally required to pay your wife in 2014 under her employment agreement with them. Accordingly, they set aside the funds to pay your wife in 2014 but failed to actually make the payment due to a clerical error. But if she had insisted on being paid in 2014 for it, they would have been legally obligated to comply. As a courtesy, she is allowing them to wait until 2015, but if she wanted, it sounds like she could have insisted on receiving the money in 2014 because it was due in 2014. If that understanding of the facts is correct, then under the regulation quoted, the income was received in 2014, so it is taxable in 2014, not 2015.

The regulation isn't exactly a model of clarity so you could probably make an argument for whichever year favours you more. It doesn't provide an election though.
« Last Edit: March 04, 2015, 01:45:34 PM by Cathy »

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #4 on: March 04, 2015, 01:45:26 PM »
So my wife's employer screwed up and didn't pay her correctly for 2014.  They will be making up the difference in 2015, which means a check. 

As far as I know (I googled but didn't find anything), we just pay taxes as if this is 2015 income.

However, it was earned in 2014.  Does this matter for individuals?  I think it matters for other entities, but just want to make sure everything is on the up and up if we take the easy route and consider it 2015 income.  It might also be more advantageous as 2014 income for tax bracket/AMT purposes -- do we get a choice?

Something similar happened to me a few years ago.  I just reported the income in the year I received it.  My employer did the same.  No complaints from the IRS... yet.

Good luck on yours.

Numbers Man

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #5 on: March 04, 2015, 01:47:54 PM »
It's 2015 income. Case closed.

dragoncar

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #6 on: March 04, 2015, 03:35:39 PM »
Thanks, all.  It seems like there's a colorable argument for 2014 income, but we're not talking about a super large sum either way.  I'll probably just go with whatever tax forms they send out (if they do happen to send us a corrected 2014 W-2, I'll report it as 2014) -- I guess the chances of an audit are less if the W-2 matches the filings, regardless of how finely I try to disambiguate the tax code.  But it's nice to hear the simplest approach is most likely correct.

seattlecyclone

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Re: Question for Tax Peoples - 2015 income attributable to 2014?
« Reply #7 on: March 04, 2015, 03:39:55 PM »
I would report it as 2015 income unless they send you an updated W-2. My employer pays in arrears, which means the paycheck you receive this pay period was actually for work you did in the last pay period. The result is that the first paycheck you receive in a year (and often part of the second) is a result of work you did in the previous year, but the taxes (and 401(k) contribution limits, etc.) are based on when you receive the money, not when you do the work that leads to the eventual paycheck.