Tax & Business Alert – October 2023
Word count: 368
Abstract: Receiving a sudden and
sizable influx of cash may seem like a dream come true. It can be, but many
people get carried away by a windfall and end up in worse financial shape. This
article points out some of the pitfalls and how to avoid them, as well as what
to expect in terms of taxes.
Don’t get carried away by a windfall
Receiving a sudden and sizable influx of cash may
seem like a dream come true. It can be, but many people get carried away by a
windfall and end up in worse financial shape.
If you’re hit with a financial windfall, here are some points you should
know.
Risky conditions
Perhaps the most obvious example is you may be
tempted to immediately buy an expensive new car or home. Or fraudulent
charities may come knocking. You can avoid these potential pitfalls by stashing
your windfall in a bank or money market account as soon as you receive it. Let
it sit there until you identify a few specific, reasonable goals — such as
funding your retirement or a child or grandchild’s education. Waiting at least
a month before you touch the money can help prevent impulse buys and other
mistakes.
Also,
you may owe taxes. Some windfalls, such as lottery winnings and
certain legal settlements, are subject to federal tax — as much as 37% federal
tax if your windfall pushes you into the top income tax bracket. State and
local taxes may apply as well. A tax professional can help you determine what
you owe.
Shelter from the storm
What
you eventually decide to do with your windfall depends on many factors. If you
have debt, you’ll probably want to pay it off ― especially if it carries a high interest
rate and the interest isn’t deductible. Also, establishing or boosting your emergency
savings can minimize the need to incur future debt.
Next, consider where you’d like to be five, 10 or
20 years into the future. Develop a budget that will help you move toward your
goals — whether that means retiring early, starting a business or something
else. You probably shouldn’t quit your job without having thought it through
carefully. Few windfalls are large enough to see you all the way through
retirement (depending on your age).
Long-term plan
A final word of warning: Be careful when you’re asked
for money. Friends and family members may expect to share in your bounty or may
pitch “sure-fire” investment opportunities. We can help you formulate a long-term
plan to put a windfall to optimal use.
© 2023