| November 1, 2016 | 0 Comments

During the year you may have been the recipient of unexpected funds (money!!!).  Some are from a good fortune; others are from an unfortunate incident.

If you have been involved in one of these situations there are tax consequences to consider.  Some are short term (in the current year); others will impact you long term.

Some windfalls are tax free while others are taxable.  All amounts are included in gross income, however, some are deductible from taxable income.

GIFTS & INHERITANCES – tax free if it has already been taxed.  Usually inherited IRA’s are taxed at the time of distribution to the beneficiary.

LOTTERIES, GAMBLING & PRIZES – are fully taxable.  Lump sums are fully taxable in the year withdrawn.  Installments are taxed in the year the installments are withdrawn.

DAMAGES – are taxable UNLESS they are for a personal injury or sickness.  The entire amount of the award is taxable to the individual including the amount that was deducted for legal representation.  Please remember when receiving a windfall for damages the portion for compensatory damages is tax free, however, the portion for punitive damages are taxable.  The difference between compensatory and punitive can be a gray area.  Legal fees to recover tax-free damages are not deductible; legal fees to recover taxable damages are deductible under Misc Deductions, Schedule A  due to limitations.

WHISTLE BLOWER AWARDS – are considered ordinary income; legal fees are deductible.

Windfalls of all types need to be addressed at the time received.  Taxes are usually withheld at the time on gambling or lottery winnings.  You will receive documentation at year end from the distributor.

It is up to the recipient of other windfalls to pay estimated taxes to avoid estimated tax penalties.

The best advise on all windfalls whether taxable or not is to consult your tax advisor at the time of distribution.  In addition to federal taxes, state and local taxes also need to be taken into consideration.

If the windfall is taxable, there are steps that can be taken to minimize taxes if done before year end.  Please call me to set up an appointment if any of these situations have happened to you this year.


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