Lump Sum Or Annual Payments? 4 Tax Factors To Consider

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tax filing for online sales

Do you do any selling online? Did you know that selling things online can count as a business and that you could be losing money if you don't prepare your taxes just right? Online sales have helped my family get through a very difficult year. Then, when I found out what I was going to have to pay in taxes for the income that I earned through those online sales, I about had a heart attack. After doing some digging, I decided to skip filing my taxes myself and took them to a professional for help. Find out what an accountant uncovered for me and how it helped put my money back in my pocket.


Lump Sum Or Annual Payments? 4 Tax Factors To Consider

9 December 2022
 Categories: , Blog

Whether you're retiring with a pension plan, selling off your business, or winning the lottery, the option of taking a lump sum or annual payments is a difficult one. While there are many factors to consider, one of the most financially important is tax planning. To help you make the right choice, here are four key steps to take. 

1. Learn About Tax Brackets. Under current U.S. tax law, each dollar of income isn't necessarily taxed the same. The system of tax brackets means that a lower percentage is taxed on lower amounts earned, and this grows as you earn more. For example, single individuals are taxed 10% on the first $10,275 they earn in 2022 and 12% on the next $31,500 earned. So you may want to avoid certain income thresholds. 

2. Assess Current Income. Your overall earnings for the year are the first determining factor for how much is taken in taxes. If you earned a lower amount in the year during which you could take a big payout, it may be advisable to take more because you're still in a lower tax bracket. However, if your income is already normal or higher, you'll pay more taxes. 

3. Consider Future Deductions. Tax deductions and credits are the easiest ways to reduce taxable income. So think about how you may want to use tax deductions beyond the current year. For instance, you can contribute up to $6,500 to a traditional IRA (as of 2023) to keep that money nontaxable. So if you have an annual windfall payment of the same, you pay no taxes on that windfall until retirement. 

4. Decide on Investments. What do you plan to do with the money? If your plans include any type of investments, you may face future taxes on what you earn. If you invest it in a standard taxable brokerage account, you'll pay capital gains taxes on interest and dividends. So a lump sum would be a one-time tax on the capital and future tax bills on the earnings. But an annual payment would be taxed on both the capital each year and its interest. 

Where Should You Start?

Clearly, there are a lot of nuances to think about even within this one area of financial consequences for a windfall. The best way to sort through them is to meet with an accountant who specializes in tax planning in your state. With their expertise and guidance, you'll soon find the right balance to keep the largest amount of your money possible. 

Speak to an accountant to learn more about tax planning