Coming into a large sum of money can be exciting! The thoughts of what to do first with the money are likely racing through your head. Whether you thought of vacations, a new home, a new car, or a new puppy, did the IRS cross your mind during those thoughts? They probably should as they are going to come knocking on your door; so to speak, collecting the money they are owed on your newfound income. Unfortunately no income is safe from the IRS. This could put a damper on your celebrations, but if you know upfront what to expect and how to minimize its affects, you can make the most of your money and minimize your tax penalties in the end. Let’s look at ways to manage your taxes after a windfall.
Think Long Term
While your head might be spinning with ideas of your next vacation, new car, or a new wardrobe, you should think more long-term with your new income. Retirement is a great place to start because not only does it allow you to have money set aside for when you are ready to stop working, but it has tax savings as well. Consult with a tax professional to see the maximum amount of money you can contribute to an IRA or 401(K) this year and still have the money be deducted on your taxes and then take advantage of that figure! Yu kill two birds with one stone with this tip, and pay the IRS less in the long run. As an added bonus, if you do contribute to a 401(K), your employer might match all or a fraction of your contribution, giving you evens more money for retirement.
Give to Charity
Most everyone wants to give something to charity when they come into money. There are several ways to do this. You can give them a lump sum and write it off on your taxes or you can set up a Donor Advised Fund, which works similar to the way a trust would that is set up for a child. The charity is given a certain amount of money at the intervals that you determine. This allows you to write off the charitable contributions for that length of time while doing some good with the money you have obtained. Either way that you decide to give, your contribution will be tax deductible.
Pay Estimated Taxes
No one likes to think about paying taxes when they earned a large sum of money, but it is necessary. If you are worried about what you will owe, why not pay estimated taxes now before April 15th arrives? You can talk to a tax relief experts to see how much of your new money should be put towards taxes and send it in to the IRS. When it comes time to file taxes, you will get the money back if you overpaid. On the other hand, if you under pay or neglect to pay at all, the IRS will hit you with penalties and fees that are not pleasant to pay.
Go to School
Have you always wanted to go back to school? Now is a great time and you can afford it! Without student loans, you have the ability to write off your education expenses. This allows you to save money that you owe to the IRS while bettering yourself with a higher education. Whether you go to school in order to get a better job or you do it for personal reasons, the result is the same when it comes time to file your taxes.
Get a Timeshare
Timeshare property taxes are usually deductible on your tax return, just like the property taxes on your primary residence. If this is the case for you, invest in a timeshare where you and your spouse typically vacation and use it often! This allows you two benefits with your windfall – you get the vacation you dream of when the money hit your hands and you get a tax deduction for a portion of it. This can help to decrease your tax liability, allowing you to avoid tax relief programs when April 15th comes, such as an installment plan or asking for an extension on what you owe. No one wants to deal with excessive taxes, and this is one of the most exciting ways to deal with it.
Once the excitement of a windfall wears off, it is time to figure out how you are going to manage your money. It is best to talk to a professional before doing anything as excitement can get in your way of making smart decisions. Any decisions that you make should have your taxes at the forefront of your mind. You do not want unpleasant surprises come next April, when your money is already spent and yet you owe the IRS a large sum of money. Understand your tax obligations now and the ways to overcome them in order to have the most success possible.
Share this article in your social media circles – you never know who might have come into a windfall. You could prevent them from making mistakes that could cost them a lot of money!