The proper year for reporting income depends on your method of accounting (cash or accrual). The majority of taxpayers filing Form 1040 use the cash method of accounting. Cash method taxpayers report the items of income in the year in which the income was actually or constructively received. For cash method taxpayers, the year that the income is earned is irrelevant.

With respect to "actual receipt," if you receive an item of income that is paid to you by check, your receipt of that check is taxable to you as if it were cash.

With respect to "constructive receipt," constructive receipt occurs when the income is made available to you. For example, you are in constructive receipt of income paid to you by check if the check has been cut and is readily available to you, even though you have not picked it up as planned. Also, you are in constructive receipt of bank interest when it has been credited to your account, even though you have not withdrawn it.

If you are filing Form 1040 (PDF), it is unlikely that you are an accrual method taxpayer. Nevertheless taxpayers who use the accrual method generally report income in the year it is earned, billed, or received, whichever occurs first.

References:

• Form 1040 (PDF)
• Publication 17, Your Federal Income Tax
• Publication 538, Accounting Periods and Methods