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My wife recently completed her PhD. At her school, when grad students advance to candidacy, they get a raise. This should have kicked in three years ago (before we were married), but due to a series of administrative mistakes, this raise was not paid until this year. All of it was paid at once (about $3600).

Together, we have a higher marginal tax rate than she did before we were married. Filing separate returns doesn't seem to be a good option for us.

Is it possible to count this income in the years it was earned? If it's possible, how would we report that and what documentation would we need?

I have found IRS publications 957 (Reporting Back Pay and Special Wage Payments to the Social Security Administration) and 15-A (Employer's Supplemental Tax Code). It sounds like wages are supposed to be reported in the year paid, not the year earned. I'd be glad if anyone knows a way to adjust for this.

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    On $3600 of income, what's the actual difference in tax liability? Can you just redirect the additional slug of income to retirement savings, thereby deferring the tax, and just call it done? – Rick Goldstein Dec 8 '14 at 23:17
  • I haven't crunched the numbers, but I think it will be around $1000, so it's worth doing something about, if there's anything to be done. We're already maxing out our IRAs and 401ks, so we can't send any more money that way. – Jay Dec 9 '14 at 2:20
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If you're a cash based tax payer (which you most likely are), you cannot do so. You report the wages in the year you receive them. You cannot back-date earnings for your tax benefit.

  • I missed the "not paid until this year"... yes, if you received the money this year, you're taxed on it this year. When you should have gotten it isn't relevant for tax purposes. – keshlam Dec 8 '14 at 20:22
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    At risk of asking a legal question, is it possible then to make a claim on the employer for your material loss as a consequence of their negligence? Assume for the sake of argument they were negligent and you can prove it and all that -- I'm asking whether there's a tort, not how difficult the court case would be :-) – Steve Jessop Dec 8 '14 at 21:00
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    @SteveJessop - Would it be worth the time and expense? On $3600 of marginal income, what's the actual difference in tax liability between the tax years? Doesn't seem like it would be a good use of resources. – Rick Goldstein Dec 8 '14 at 23:12
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    @SteveJessop you can try and sue for damages, but mere tax liability is not damages. You're liable for the taxes on your income when you receive it and the employer has nothing to do with it. You can claim the employer owes penalties and interest for the delay on its own, though. Check with a labor-law attorney. – littleadv Dec 8 '14 at 23:42
  • @littleadv: ah, so a tax liability that wouldn't have fallen had the contract been honoured, is excluded from the concept of "consequential damages"? Shame. – Steve Jessop Dec 9 '14 at 0:42

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