- 1). Get some advisers on your team. If you are receiving a truly large sum, you will want to consult a tax adviser, at a minimum, but also an investment adviser and life insurance professional to ensure you are using the money efficiently to provide for your financial security.
- 2). Identify whether the windfall is from a taxable or non-taxable source. The death benefit from a life insurance policy, for example, is generally tax-free. You do not need to worry about federal income tax liability from a death benefit lump sum, though you will need to pay taxes on any interest earned from the money. However, you may have to pay taxes if you acquired the life insurance policy as an investment, under the IRS's "transfer for value" rules.
- 3). Annuitize. In some circumstances, you may be able to lower your overall tax bill by electing to receive the money in smaller sums, spread out over a number of years, rather than as a single lump sum. This may help minimize the amount of money that gets taxed at the very top brackets, and maximize the percentage of the money taxed in lower income tax brackets.
- 4). Defer income to the next year. If you have a choice about when to receive income from a business, or withdraw taxable income from a retirement plan, consider waiting until the following year. Otherwise, your additional income from these sources may be pushed into higher tax brackets.
- 5). Do an AMT analysis. AMT stands for "alternative minimum tax," and it refers to a separate set of tax rules that higher income individuals must follow. Many deductions that are commonplace under regular income tax rules are disallowed under AMT rules. The extra income from the windfall may push you into AMT territory. If you have any deductions that will be disallowed under AMT rules, try to push those expenses into a future year in which you are not receiving a windfall.