Ratable Accrual Method

You probably think of income tax going something like this: you get a check, and some of that check is withheld for taxes. Later, you file a little form that details when you got paid and what taxes got taken out. However, if you make money from more esoteric endeavors then working for a living, things get more complicated. As such, there are other ways to calculate the amount of taxes owed.

Enter the ratable accrual method. Instead of counting income as its paid, the income gets counted as it accrues. The process often comes up related to bond income.

The calculations for the ratable accrual method can get complicated, depending on the situation, but here's a simplified example:

A bond pays you $1,200 every quarter. You are set to collect your next $1,200 check on January 31. However, your tax year closes on December 31. If you're counting the income as it's paid, the full $1,200 would count in the next tax year. However, if you calculate the income as its accrued, then $800 was accrued before the end of the year, i.e. $1,200 divided by the three months in a quarter. January's $400 counts for next year, but the $800 for November and December count for this year.