Some Things To Do When A Windfall Comes Along

A windfall of cash is one of the best things that can occur in the life of a person. However, that happiness can turn to heartache if certain measures are not taken to lower the inevitable tax bill that will come due. Here are some tax strategies that might be appropriate to save a client money when they come into unexpected riches:

•  The first step is to determine if the windfall will be taxed at ordinary income rates or as a capital gain. The source of the income will determine the classification, for example, lottery winnings will be taxed at ordinary rates while stock will be a capital gain.
• Contributing to certain qualified retirement plans, such as an IRA, can net the estate a tax deduction. While the limits are not high enough to substantially reduce a tax burden, any little bit can help plus retirement is funded in the process.
• For those who qualify, a health savings account may also offer tax relief. Contributions are deductible and will be useful down the road to cover medical expenses.
• For those that already have portfolios, the year of the windfall may be a good time to sell under performing stocks. If the windfall results in a capital gain then the capital loss from the sale will reduce the tax burden while also providing new liquidity to reinvest in better performing assets.

See Eric Rosenberg, 5 Ways to Reduce Your Taxes After a Windfall Gain, Investopedia, October 5, 2015.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.