By Harness WealthTaxes — May 14, 2020

Tax Planning for a Large Windfall or Inheritance

When you receive a large sum of money, your life can change in many profound ways. However, a financial windfall is not without consequences. One of the most immediate of those consequences is your tax liability.

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The largest sudden amount of money you may have come in to in your lifetime will likely also be associated with the largest tax bill you’ve ever seen.

You’ll need to plan ahead to budget for the taxes you owe and be diligent about key tax regulations you can use to your advantage to help reduce the amount of your newfound funds that you’ll have to give to the IRS. 

Understanding How a Financial Windfall is Taxed

The specifics of how your newfound funds will affect your taxes are going to vary depending upon the source of the money. 

In some situations, you will actually not owe federal tax even if you receive a large sum of money or other assets, but in other circumstances there will be tax implications. For example:

Different states have different rules for how inheritances, life insurance payouts, lottery winnings or prizes, and the sale of a business or investment are taxed. You need to account for both federal and state rules when you determine your total tax liability.

When you have taxable income from a windfall, you should also be aware that the influx of funds that you have received may push you into a higher tax bracket. 

Special Considerations for Certain Types of Inheritances: IRAs, Non-spouse, etc.  

There are some circumstances where you’ll have special tax rules to follow as a result of receiving an inheritance or another windfall.

Professional Tax Help for Inheritances and Windfalls

Above are just a few examples of things to know about the tax implications of a windfall.  A tax advisor can assist you in tax planning so you are prepared to comply with your obligations to the IRS while limiting the taxes you have to pay.

They will have had experience managing clients who have had similar windfalls, family situations, general financial situations, and goals as you, and can flag certain parts of the tax law that you may not have thought to take advantage of, or help provide guidance on actions you’ll need to take as you go through the process of having the assets legally transferred to you. 

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