How do I lower my W2 income?
Rental Property Investor · Honolulu, HI · Member since 2018 · 11 posts · 17 votes
Here's what you gotta do. Go to your employer and tell them hey you need to stop paying me because all this money is going to cost me too much in taxes. Then at the end of the year you'll have a lower W-2, maybe significantly lower. ;) HAPPY FRIDAY!
Additionally, if you had the right to receive your bonus/salary in 2018 and you "asked" your employer to wait until 2019 to pay it, then it would be considered this year's income. They may incorrectly fail to report it on this year's W2...but you are supposed to pay tax on it.
I disagree. If the money has not been paid - i.e. you do not have access to it - then it is not income to you until the next year. Also, not a deduction to your employer.
Not if you had the contractual right to receive it in the current year, yet directed the company to wait until the new year to pay it. This is "constructive receipt" and the taxpayer (even on a cash basis) owes the money currently. 401k plans are exceptions and subject to limitations in the Code, but other contractually owed payments electively deferred are constructive receipt.
Additionally, if you had the right to receive your bonus/salary in 2018 and you "asked" your employer to wait until 2019 to pay it, then it would be considered this year's income. They may incorrectly fail to report it on this year's W2...but you are supposed to pay tax on it.
I disagree. If the money has not been paid - i.e. you do not have access to it - then it is not income to you until the next year. Also, not a deduction to your employer.
Not if you had the contractual right to receive it in the current year, yet directed the company to wait until the new year to pay it. This is "constructive receipt" and the taxpayer (even on a cash basis) owes the money currently. 401k plans are exceptions and subject to limitations in the Code, but other contractually owed payments electively deferred are constructive receipt.
I'm not a lawyer, but my understanding is different.
"...However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions..." - Regs 1.451-2
If the employer has not issued the payment, the receipt seems to be conditional on the employer's availability of funds, the employer's willingness to issue the payment, the employee's conduct prior to the receipt, etc.
Correct me if I'm wrong.
Additionally, if you had the right to receive your bonus/salary in 2018 and you "asked" your employer to wait until 2019 to pay it, then it would be considered this year's income. They may incorrectly fail to report it on this year's W2...but you are supposed to pay tax on it.
I disagree. If the money has not been paid - i.e. you do not have access to it - then it is not income to you until the next year. Also, not a deduction to your employer.
Not if you had the contractual right to receive it in the current year, yet directed the company to wait until the new year to pay it. This is "constructive receipt" and the taxpayer (even on a cash basis) owes the money currently. 401k plans are exceptions and subject to limitations in the Code, but other contractually owed payments electively deferred are constructive receipt.
I'm not a lawyer, but my understanding is different.
"...However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions..." - Regs 1.451-2
If the employer has not issued the payment, the receipt seems to be conditional on the employer's availability of funds, the employer's willingness to issue the payment, the employee's conduct prior to the receipt, etc.
Correct me if I'm wrong.
I don't have the cites, but I'm fairly sure that the way the IRS interprets this is that if you have "earned" the bonus or salary payment and essentially have the unlimited right to receive it with no further action or risk on your part, then you have constructively received it even though you told them to withhold the payment for some future tax year. The issue is your right to receive it and whether that has been earned, then you elected to receive it later than originally contractually promised. In other words, if there is no legal risk that the company can refuse to issue the payment later, then you have earned it. With bonuses, it's a little bit of a gray area, but my understanding is that if your bonus plan says your bonus/commission/salary for November is to be paid on Dec. 15, then you tell your employer to hold the payment until January, you still owe tax in the current year. Also see the limitations in 401Ks, restrictions on 'at risk' amounts in non-qual deferred compensation, and "Rabbi Trusts".
Constructive receipt concept is designed to stop "I have not pulled this envelope from my mailbox until January" tricks.
If the payment has not been issued, you have not received it, constructively or otherwise.
The concept of "you have earned it" has to do with income for the accrual accounting purposes, not for constructive receipt.
This has been my understanding, until proven wrong.
There are two dimensions revolving around year of inclusion for an individual taxpayer: actual receipt and constructive receipt.
Actual receipt is when payment is in your possession. A check in hand that you hold and wait to deposit in 2019 instead of 2018 would be actual receipt and appropriate year of inclusion would be the 2018 tax year. A check in your mailbox that you refuse to check before year-end is also actual receipt.
Constructive receipt deals with income that is available to you without substantial limitation that you otherwise delay into a new tax year or refuse to accept. A bonus available to be paid to you on 12/15/2018 that you request your employer pay out on 1/1/2019 is constructively received in the 2018 tax year.
A check dated 12/28/2018, mailed to you, and received on or after 1/01/2019 is strongly arguable 2019 tax year income as it was not received by you in 2018. Even if it was included on your 2018 W-2. There was neither actual receipt nor constructive receipt in the 2018 tax year.
Pulling expenses forward is much easier than deferring income. If you itemize and aren't capped out on SALT I would examine Q4 state and local income tax payments that need to be made before year end. Charitable contributions as well...
For businesses, it's time to restock the supply cabinet. Perhaps office or equipment upgrades are also due. All are deductible (assuming below de minimis safe harbor), even if put on a credit card before year-end.
Income is taxed on cash basis. if you did not receive your bonus until 2019 then you are taxed in 2019, not in 2018. The only situation this is not true is if you are engaged in a long term project (e.g. 5 year project) and you are paid at the end of the project, then you may "recognize" some of the unpaid compensation as 2018's income based on % of completion.
I work in an investment management firm. My bonuses for 2018 are paid on February 2019. I am not taxed on this in 2018. On the contrary, my bonus from 2017 which was paid in Feb 2018 will be included in my W-2 this year. This is for individual tax purposes.
@Stephen Thomas maybe not the answer you are looking for, but what about charitable donations? Also, you can make some improvements to your property (e.g. fences, new fixtures, etc.) You can't expense them, but you can capitalize and depreciate them over few years. It'll increase the value of your property and maybe even your rent. You can enjoy the benefit of depreciation over many years unlike one time expense.
@Michinori Kaneko "Income is taxed on cash basis. if you did not receive your bonus until 2019 then you are taxed in 2019, not in 2018."
Not necessarily. You're ignoring the concept of constructive receipt.
"I work in an investment management firm. My bonuses for 2018 are paid on February 2019. I am not taxed on this in 2018. On the contrary, my bonus from 2017 which was paid in Feb 2018 will be included in my W-2 this year. This is for individual tax purposes."
If it is the company's policy to pay bonuses in February of the following year, neither actual nor constructive receipt has occurred and you are correct. If it is the company's policy to pay bonuses in December, and you ask that it is deferred to February, constructive receipt has occurred (assuming no substantial limitation), and you should be taxed on that income in the year which it is available to you.
@Michinori Kaneko "Income is taxed on cash basis. if you did not receive your bonus until 2019 then you are taxed in 2019, not in 2018."
Not necessarily. You're ignoring the concept of constructive receipt.
"I work in an investment management firm. My bonuses for 2018 are paid on February 2019. I am not taxed on this in 2018. On the contrary, my bonus from 2017 which was paid in Feb 2018 will be included in my W-2 this year. This is for individual tax purposes."
If it is the company's policy to pay bonuses in February of the following year, neither actual nor constructive receipt has occurred and you are correct. If it is the company's policy to pay bonuses in December, and you ask that it is deferred to February, constructive receipt has occurred (assuming no substantial limitation), and you should be taxed on that income in the year which it is available to you.
@Michael Plaks
This is exactly as I said. The example was that your bonus was normally payable 12/15/18 and you requested a delay in issuing the actual payment until 2019. In this case you constructively received your bonus and owe taxes on it in 2018. You do not have nearly the flexibility in timing earned income as expenses.
A bonus available to be paid to you on 12/15/2018 that you request your employer pay out on 1/1/2019 is constructively received in the 2018 tax year.
You may be right, but so far it's your interpretation v. mine. Do you have any support for your position? I cited the Regs above and why I think that a payment not issued qualifies as substantial limitation.
§1.451-1, General rule for taxable year of inclusion
(a)General rule
Gains, profits, and income are to be included in gross income for the taxable year in which they are actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer's method of accounting. Under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Therefore, under such a method of accounting if, in the case of compensation for services, no determination can be made as to the right to such compensation or the amount thereof until the services are completed, the amount of compensation is ordinarily income from the taxable year in which the determination can be made. Under the cash receipts and disbursements method of accounting, such an amount is includible in gross income when actually or constructively received. Where an amount of income...
§1.446-1, General rule for methods of accounting
(c)Permissible methods
(1)In general
Subject to the provisions of paragraphs (a) and (b) of this section, a taxpayer may compute his taxable income under any of the following methods of accounting:
(i)Cash receipts and disbursements method
Generally, under the cash receipts and disbursements method in the computation of taxable income, all items which constitute gross income (whether in the form of cash, property, or services) are to be included for the taxable year in which actually or constructively received. Expenditures are to be deducted for the taxable year in which actually made. For rules relating to constructive receipt, see § 1.451-2. For treatment of an expenditure attributable to more than one taxable year, see section 461(a) and paragraph (a)(1) of § 1.461-1.
§1.451-2, Constructive receipts of income
(a)General rule
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. Thus, if a corporation credits its employees with bonus stock...
Emphasis added to all citations above.
It's pretty clear IMO. Unless substantial limitations exist, the example fact pattern you quoted me as giving is deemed constructively received in 2018 although not actually received until 2019. Thus, proper year of inclusion is the 2018 tax year.
Constructive receipt is a facet of the cash basis method of accounting designed to mitigate "pay me later" deferral schemes. Accrual has constructive receipt built in by design.
There are ways to get around constructive receipt, one such way is contract structuring.
Are you going to argue there's no constructive receipt in the example quoted? Or are you going to argue substantial limitation? Both?
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. Thus, if a corporation credits its employees with bonus stock...
It's pretty clear IMO. Unless substantial limitations exist, the example fact pattern you quoted me as giving is deemed constructively received in 2018 although not actually received until 2019. Thus, proper year of inclusion is the 2018 tax year.
Are you going to argue there's no constructive receipt in the example quoted? Or are you going to argue substantial limitation? Both?
First, I AM going to argue. Always. :)
The question of whether he "may draw upon it at any time" is not as clear as you want it to be, IMO.
Example. My employee asks me to not pay his December check until January (I wish). I agree, and I spend all my money from the business account on a XMas shopping spree. If he changes his mind and wants his money on Dec 31 - too bad for him. I have no cash in the account, and he has no other way to "draw upon it."
What I really want to find is not yours or mine interpretation but a case precedent on how the courts decided this specific issue. Otherwise we can continue for fun forever and never arrive to an agreement.
@Michael Plaks "Example. My employee asks me to not pay his December check until January (I wish)."
This implies the employee could have taken the bonus before year-end if he wanted to. Everything else that follows is irrelevant. His failure to actually receive the payment in December is solely due to his own volition, not substantial limitation or external circumstances.
Treas Reg §1.451-2(a) states "Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is...otherwise made available...so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given."
I don't think there's a lot of leeway for interpretation there...
If you're looking for case law that deals specifically with a bonus situation that was deferred into the following tax year, claimed as the following year's taxable income, and was upheld by the tax court please let me know if you find one. None exist to my knowledge.
There's tons of case law surrounding what constitutes substantial limitations regarding constructive receipt, and what doesn't. Not a lot surrounding constructive receipt and employee earned income deferral...
In your example my position is that we have constructive receipt without substantial limitation. I'm not a gambling man but I would bet dollars to donuts the Service would take the same position.
Your client (you) has burden of proof that there's no constructive receipt, or there is constructive receipt but substantial limitation exists. Using authoritative guidance, what is your argument?