Federal Income Taxes

You suddenly discover you won a contest or a wealthy relative passed away and willed to you a large sum of money. For tax purposes you are a cash-basis taxpayer. That means income that is earned or unearned is not taxable until you receive it.

Real estate and physical personal property won is defined as being non-financial property that has a certain value. If won via sweepstakes that property is subject to taxation. However, that property is not subject to capital gains tax as it has no cash value to you until such property is converted into cash. Capital stocks and bonds are also intangible assets that might earn money for you in the form of dividends and/or interest as time passes. As a matter of fact, state, county and/or municipal bonds pay the owner of such intangible financial instruments federal income tax free money as time passes, or until the issuer of those bonds buys back their stated face value of each of those bonds.

When you receive such property in the form of cash that amount is taxable in the year that you receive it. So now you want to determine what the tax liability to you will be if you simply take the money and deposit it in a bank or other financial institution, and/or spend that money to improve your lifestyle.

Then again, you might be able to roll over that cash into a tax deferred annuity. When you do that only the money you receive is taxable. That amount can be a great deal less of the total amount because it is paid out for a period of years until there is no money available in that account.

You might own a house that has a large mortgage for which you pay a mortgage payment each month. The money you receive and pay the tax for can be used to pay off or reduce your mortgage, thus decreasing the interest charged on the unpaid balance of your mortgage.

If you are in doubt as to what your tax liability might be after you receive a great deal of money and/or other forms of property you might want to hire a financial adviser who can better find ways to reduce your tax liability during the year that you receive that prize or property from a friend or a member of your family.

Keep in mind that a tax event occurs when you have control of the asset. In the case of real estate the value of such real estate is not realized by you until you sell that asset. In the meantime that real estate can earn taxable money for you in the form of rental income less the expenses paid to maintain that property.

The point here is that you have things that are available to you in which you might be able to reduce the taxes associated with a sudden increase in your yearly income. One trick that is employed by related family members is to co-own the property that will eventually be entirely owned by you. Assets within a joint bank account and/or other financial institution automatically becomes yours and you will not incur any additional tax liability. Money paid out in the form of taxes is gone forever, thus the proper management of that money or other forms of wealth is for you to control.