Windfall Tax Planning StrategiesWindfall Tax Planning Strategies

Receiving a bonus, inheritance, lottery winnings, or any other type of unsuspected windfall can lead to serious tax consequences. You may find yourself in a higher tax bracket, subject to paying Alternative Minimum Tax or disqualified from tax credits or deductions. In this article, we will go over windfall tax planning strategies that will help you deal with these situations.

Spread It Out

The IRS taxes any bonus you receive from your employer at a flat rate of 28%. However, if your employer offers a deferred compensation plan, you can utilize it as a way to spread out your bonus and your tax liability. If your bonus was awarded to you through stocks or shares, be careful about when you choose to cash them out. If you hold them for over a year you can take advantage of the lower long-term capital gains tax rates.

Pay Up Your Expenses

Another windfall tax planning strategy is to prepay upcoming deductible business or personal expenses. This must be done before December 31st of the year you received the windfall in. You also may want to pay up your Health Savings Account to your maximum contribution limit.

Contribute to Charity

Talk to your accountant about helping you set up a Donor Advised Fund. This account allows you to use your windfall to make regular distributions to a charity. But you are able to take the whole amount put into the Donor Advised Fund as an up-front tax deduction in the year that you create it.

Pay Your Taxes

You may want to use your windfall to catch up on your Estimated Tax Payments. Or you can use that money to pay your tax withholding obligations. This can help you avoid penalties the IRS charges for late payments. If your windfall puts you into line for having to pay Alternative Minimum Tax, then you may want to talk with your accountant about the following suggestion. You may have the option to pay next years real estate taxes in advance. If you qualify, the IRS will let you deduct those payments in the current tax year.

Invest It

One of the best windfall tax planning strategies you can do is to use a qualified retirement plan to reduce your taxable income. Your windfall can be used to jumpstart your retirement savings. If you have a 401k you can contribute up to $18,500 a year into it. If you are over 50 you can contribute an additional $6,000 a year. Utilizing your 401k also may have another advantage, which is you may qualify for employer matching. This can allow you to increase your windfall even more.

A second way you can invest is with an Individual Retirement Account (IRA). You can contribute up to $5,500 of pretax funds to an IRA each year. You can contribute an additional $1,000 a year if you are over the age of 50. These contributions are deductible from your taxable income. However, the size of the deduction you can take is based on the filing status and your income. As well as if you are offered a retirement plan through your employer. If you are interested in setting up an IRA, Wealth Guardian Advisory can help. We offer competitive fees and an in-depth understanding of investment taxation.

Protecting Your Windfall

It is our hope that these windfall tax planning strategies can help you to protect your extra income from taxation. Before you implement them, be sure to meet with your accountant so they can help you apply them in the best way for your situation.

Questions? Want to schedule an appointment? Contact us by clicking here.