What to do About Windfalls

Anytime you receive a sudden and unexpected inflow of cash, you probably count yourself lucky If you’re the adventurous type, you might immediately use the money to go on a spending spree, or, if you’re the thrifty sort, you might stash the money in savings.

What you need to realize, however, is that no matter how you came about the money or what you plan to do with it, an unexpected windfall is still just plain money and needs to be treated accordingly.

Treat it As Income                  

In the vast majority of cases, any money, whether you win it on a game show or inherit it form a relative, still counts as income. As such, it needs to be reflected as income when you file your taxes. If you don’t count it and it later gets found, you could end up paying more in penalties and/or back taxes than it’s actually worth, so act accordingly. If you’re not sure whether or not your newfound money counts as income, check with an accountant, ideally before you spend any of it.

See if it Changes Your Income Bracket

If a windfall is particularly large, or, if it happens to come right when you’re at the edge of a bracket, it does have the potential to change where you lie in terms of your income bracket.

If you are bumped to a new bracket, this could mean a domino effect, i.e. a lot of changes in how and what you file. If you are aware that your income bracket has changed due to a windfall or if you think that may be the case, there’s no better time to check in with an accountant and see what this means for your taxes this year, or, in the case of very large and longstanding windfalls, for the future.

The thing to take away from all of this is that a windfall needs to be treated exactly the same way you would treat any money you earned because essentially, that’s what it is. Ask an accountant if you have questions; if you can do that and handle your windfall appropriately in general, it can be the blessing you always hoped for, rather than a surprise curse.