Naturally, your first thought may be about what you can do with it. Before you decide what happens next, though, there’s another part of the equation to consider.
What will this money mean for your taxes?
How am I supposed to know the tax impact before I make a financial move?
You don’t need to know every tax rule yourself. The important part is recognizing that a financial decision could have tax consequences in the first place.
Talking with your tax professional ahead of larger financial moves can help you understand how a sale, distribution, bonus, or other financial event could affect your taxes. You may find that the tax impact is fairly minimal, or you may learn that you need to set aside part of the money to cover what you’ll owe.
Either way, you’re getting that information while you still have the opportunity to use it.
What the Amount Doesn’t Tell You
Taxes don’t have to drive every financial decision you make. However, they do deserve a place in the conversation.
Imagine taking a $30,000 retirement distribution because you need $30,000 for a major expense. If that distribution creates a tax liability you didn’t account for, you may have solved one financial need while creating another one for yourself later.
That doesn’t necessarily mean taking the distribution was the wrong decision. It means the amount in front of you didn’t tell you everything you needed to know before making it.
The Tax Side of the Transaction
The tax impact isn’t always obvious when money changes hands. A few common financial decisions help illustrate what that can look like.
1. Selling an Investment
When you sell an investment, the amount you receive from the sale gets your attention first. For tax purposes, there’s more you should consider. What did you originally pay for the investment? How long did you own it? Did you sell it for a gain or a loss?
The thing to remember is that what you receive from the sale and what may be taxable aren’t necessarily the same. If you made money on the investment, there could be taxes to plan for before you decide what to do with that money.
2. Taking Money From a Retirement Account
The amount you take out of your retirement account isn’t always the amount you get to spend.
There are a few things behind that number. The type of account, your age, and the type of distribution can all affect how the money is taxed. In certain situations, additional taxes may apply too.
When you’re taking the money for a specific purpose, this becomes especially important. You may know exactly how much you need to pay the bill, make the purchase, or cover the cost. That doesn’t necessarily mean you should withdraw exactly that much.
3. Receiving a Bonus or Other Additional Income
Taxes already came out of your bonus, so it would be reasonable to assume the tax part is done. However, the amount withheld may not fully cover the taxes you’ll owe on that additional income.
Withholding is a payment toward what you’ll owe for the year. Your bonus becomes part of your overall income, and your final tax bill is based on more than what was withheld from that one payment.
Before treating everything that lands in your account as yours to spend, it helps to know where you stand.
While You Still Have Options
None of this means taxes should be the deciding factor every time money is involved. Knowing the tax impact gives you a chance to account for it as you’re making the decision, rather than after the fact.
Before making a significant financial move, find out what the transaction could mean for your taxes. You may need to set aside part of the money, adjust the amount you withdraw, or prepare for an additional tax payment. Or, you may find there isn’t much to worry about at all.
Know When to Ask
There’s no question that having money available can open up possibilities. Taxes can change how much of that money is really yours to work with.
You don’t need to become a tax expert before making a financial decision. You just need to know when it’s time to ask.
Considering a larger financial move? Reach out.
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