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Question for the Money Doctors

Question submitted on Dec 20, 2010.

Question

Dear Sirs,
My wife was awarded a contract for which she had to accept payment for services that will be performed over 16 years. The payment was over $30K. Is there a way to divide the income over at least a few years to minimize the tax hit anticipated for the lump payment. Thanks, Ken Henry

Answer

It depends on her basis of accounting for her contract income.  If she is an accrual basis taxpayer, then she can recognize the revenue as the services are performed over the life of the contract.  If she is filing taxes as a cash basis taxpayer, then the payment is income when it is received and would be fully taxable in the year received. 

If she is a cash basis taxpayer, one other option to investigate with more specifics and details would be if it is possible to file form 3115 in her situation to change the method of accounting.  If she is eligible to do so based on the rules for this type of change and it makes sense based on the projected tax savings to do so, it would be worth looking into.  I would recommend seeking professional assistance in evaluating such a change.


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