Constructive receipt is a tax principle that refers to income that has not yet been physically received but is considered to be received for tax purposes. Under the constructive receipt doctrine, a taxpayer must report income when it is credited to their account or made available to them without substantial limitations or restrictions, even if they have not taken actual possession of the funds.
For example, if a taxpayer has a check issued in their name that is held by the payer but is available to be cashed or deposited at any time, the taxpayer is considered to have income from the moment the check is issued. This means that the taxpayer must report this income on their tax return for the year in which the check was issued, regardless of whether they actually cash it.
The principle of constructive receipt is important in tax planning, particularly for individuals and businesses trying to manage their taxable income strategically. It underscores the need for careful financial planning, especially when it comes to timing income or expenses in relation to tax obligations.
« Back to Glossary Index