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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: brandino29 on July 31, 2013, 07:19:21 PM

Title: Tax on a windfall and what to do with it
Post by: brandino29 on July 31, 2013, 07:19:21 PM

My fellow mustachians,

My mother and her partner just recently settled a lawsuit against his former employer for $125,000.  After the lawyer took his generous cut of $45k they're left with $80k.  Is a windfall like this taxed as if it were normal income (it was backpay afterall) or at 30% as a short-term gain? 

The next question is what to do with it.  They're already buying a new vehicle (which they probably did need), but at least I was able to convince them they did not need a brand new 2013 Toyota Tundra. Instead they ended up with a 2011 Toyota Tacoma for $6k less (I'll take that as a win).  And they do have a few thousand on a HELOC to pay off.  My mom is in her early 50s but he's a little older at 62 with low risk tolerance and limited savings, including no real emergency fund.  I've recommended doing a 12 or 24 month CD ladder with them or possibly a bond fund, but mainly I believe they need something with very low risk --- but obviously more than the .05% in a standard savings account. 

Any other thoughts?

Title: Re: Tax on a windfall and what to do with it
Post by: kkbmustang on July 31, 2013, 07:32:43 PM

If it was for back wages, it should be subject to the same tax as wages (i.e., federal income tax and employment taxes). It should not be taxed as short-term capital gain (although, FYI, short-term gain is subject to tax at the same rates as ordinary income, but would not be subject to employment tax unless they are compensation related equity).

Title: Re: Tax on a windfall and what to do with it
Post by: brandino29 on August 01, 2013, 08:32:21 AM

Thanks Mustang.  So you think we should anticipate them having to contribute to FICA?  Would they also then be responsible for the employer's portion?