Question

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when?

1) Julie in 2016.
2) Julie in 2017.
3) Jason in 2016.
4) Jason in 2017.
5) None of the choices are correct.

Answer 1

Jason must report the year-end bonus income in 2016 because as a cash basis taxpayer, he constructively received the income when it was made available to him at the end of that year, despite physically receiving it later. The correct option is 3.

Step-by-step explanation:

Considering Jason is a cash basis taxpayer, income is typically reported in the year it is received. In this situation, despite Jason's desire to have his daughter, Julie, pay tax on his bonus by picking up the check on January 2, 2017, it does not change the fact that the income is attributable to him. Since the bonus was available to him on December 31, 2016, it is constructively received by him in that year even though he physically received it the following year.

Therefore, the correct answer is that Jason reports the income, and he reports it in 2016. Julie acts only as an agent to collect the payment on behalf of Jason; thus, she has no tax liability for the bonus.