Freelancers and consultants have it made, right? They have control of their own schedule, working from home — or anywhere else — and working only when they feel like it. They’re fully autonomous, deciding when to work and when to play. As long as they meet client deadlines, they’re good. That lifestyle is one that many people who punch a time clock (real or theoretical) envy.
But there are aspects of self-employment that aren’t so rosy. Self-employed workers have to purchase their own medical insurance. They have to manage the operational aspects of their business along with doing the work. And they have to set aside enough money to pay taxes when it’s time.
No one takes federal or state tax withholdings from a freelancer’s paycheck. That means they have to guess what they’ll earn each year and estimate their tax liability. The easiest way to manage all this is with the help of a trusted accountant who can review past years’ earnings and provide an estimate of what they’ll earn and owe for the current year. Their accountant can also set them up with estimated tax payment vouchers to help them stay on track.
Estimated taxes are something self-employed workers often aren’t that familiar with. Many look at them more as a suggestion rather than a requirement. But the reality is that the IRS expects workers to pay taxes throughout the year as money is earned. That’s why employers take money out of employees’ paychecks each pay period. That money goes to the IRS and is then reconciled at tax time the following year.
If you’re self-employed, you need to know that the IRS expects you to pay as you go, too, and that’s where estimated tax payments come into play. Estimated tax payments are made quarterly, which can be a good thing. They help you stay ahead of your tax liability and avoid a big bill at tax time. However, many freelancers, contractors, and new business owners have a hard time making estimated tax payments.
Here’s why it’s so important to keep on top of this. The IRS penalizes you for not making estimated tax payments. The penalty is calculated quarterly based on the interest rate set by the Federal Reserve. That means the penalty fluctuates from quarter to quarter and year to year. In recent years, we’ve enjoyed low interest rates that have spurred people to purchase new homes, cars, and other big-ticket items. Now, however, the landscape has changed.
With interest rates going up, the penalty for not making estimated tax payments rose to 8% on October 1, 2023. That’s a considerable increase over the low of 3% in early 2021 when interest rates hovered near zero. If interest rates continue to rise, so will the penalty for not making estimated tax payments. Industry experts expect freelancers and contract workers to be the hardest hit by this increase.
If you’re self-employed, make sure you’re keeping up with your estimated tax payments, which are due for the current tax year on April 15 (1st quarter), June 15 (2nd quarter), September 15 (3rd quarter) and January 15 of the following year (4th quarter). Your accountant can help you estimate your annual tax liability and figure out how much your estimated tax payments should be to avoid being assessed a penalty.
The professionals at Adams Accounting Solutions specialize in helping self-employed workers with all tax-related issues, including estimated tax payments. We’re here to help, whether you’re preparing your taxes or just have a tax-related question. Give us a call to schedule a consultation today. Let’s make sure you’re not hit with a hefty penalty for not paying your estimated taxes this year!
No matter how organized you think you are, it always seems like the end of the year sneaks up on you. Before you know it, it’s time to close out the books and get your tax documents in order. But what exactly does that mean?
Adams Accounting Solutions specializes in small business tax preparation in Johnson County and the Kansas City metro area. Our clients often ask when is the best time to start planning for tax day. We always recommend starting early because, despite the best intentions, life gets in the way. Projects fall apart, new employees come on board, customers who owe you money go out of business…the list of distractions is endless. Starting early on essential tasks like closing out the year and preparing for tax day ensures everything gets done on time — no matter what emergency pops up.
We’ve compiled a list to help business owners close out the year and prepare for what’s coming in April. It’s not too early to dive in. There’s no time like the present!
The first step in getting organized is knowing where everything is. If you’re planning on having a CPA do your taxes for you — and we highly recommend that — it’s critical that all your financial documentation is in one place. You’ll need any document that shows how the business did this year: cash receipts, bank and credit card statements, balance sheets, statements from third-party payment processors like PayPal and Stripe (if applicable), sales records, and payroll information. If you have a bank loan, you’ll need information on that, too, including the current balance and the amount of interest you’ve paid on the loan this year.
Part of balancing the books at year-end is knowing how much money you owe others and how much others owe you. This is the time to start reviewing accounts payable and receivable with a fine-toothed comb. If you have bills outstanding, it may make sense to pay them now, but in some cases, it may not. It’s often beneficial to carry larger expenses into the following year. A quick discussion with your accountant will help determine which step is right for you.
Once you’ve reviewed your receivables, it’s time to get on the phone and start calling. You might be able to encourage a few of your debtors to pay up before the end of the year. The more money you can collect now, the more revenue you can put toward the bottom line.
Many entrepreneurs are guilty of putting off bank account reconciliations until the last minute. By then, a year’s worth of statements has piled up, and any problems that may have arisen during the year are much more challenging to sort out. If this sounds familiar, now is the time to dive into this project. Reconcile all bank accounts and review credit card statements to ensure there were no unauthorized or mistaken purchases. If you see something that looks fishy, you still have time to sort things out before taking your documents to your accountant early next year.
A good business practice to develop is to set goals at the beginning of each year. That way, at the end of the year, you have something to measure your success by. As you pull your financial documents together, you’ll begin to get a clearer picture of how your business is doing. If you’re not where you want to be, you can examine the reasons why. When you talk with your accountant next year, discuss your findings with them. They may be able to help you adjust your goals for next year.
At Adams Accounting Solutions, we understand how much work you’ve put into getting your business off the ground. We want to help you keep it running efficiently. Part of that is putting the tax guidelines to work for you, helping you realize potential tax deductions so you keep as much of your hard-earned money as possible.
If you’re ready to start on your year-end accounting close-out, give us a call to set up an appointment. We’ll go over everything with you and help you pave the road to financial success!
Today’s digital landscape creates opportunities for would-be business owners to spread their wings. Many people have discovered the satisfaction that comes with owning their own business. Working from home (or anywhere else) is nice, too. As long as you have an idea, a laptop, and an online retail presence on Etsy, eBay, Amazon, or any other digital marketplace, you’re ready to roll.
While many online business owners start their operations with the purpose of bringing in extra money — setting it aside for that new boat, the kids’ college funds, or a dream vacation — others sell items for fun or as a hobby. Either way, it’s considered a business, and there’s enough money coming in to justify the time spent.
The reality is that many of these e-commerce neophytes go into business with little to no knowledge of tax accounting, revenue reporting, or the scope of legal and financial responsibility that comes with running a business, especially one run solely online. And that can lead to trouble. The IRS will eventually come knocking, looking for its share of the wealth.
One aspect that often catches online sellers off guard is the 1099-K form. This document has a significant impact on how online businesses manage their finances and taxes. Here’s what every online business owner needs to know about 1099-K forms and their impact on the business.
The 1099-K form is a tax document used to report electronic payments received to the IRS. These payments include debit and credit card payments, automatic bank withdrawals, and payments received through third-party entities such as PayPal, Stripe, Venmo, or other merchant payment processors. These payment platforms are responsible for sending Form 1099-K to businesses if they meet specific criteria, including a certain threshold of payment volume.
Online sellers who’ve been in business for several years and have revenue of more than $20,000 are probably familiar with Form 1099-K. It’s been in use for several years, although it’s taken a while for business owners and third-party payment platforms to fully embrace it and understand how to follow the rules around revenue reporting via Form 1099-K. Newbies in the e-commerce world — those who are selling items for fun or as a hobby — may not be as familiar with it, which means they may be in for a surprise when they file their 2023 taxes.
Form 1099-K was implemented as part of the American Rescue Plan in 2011. Tax laws changed in 2021, and the threshold for receiving Form 1099-K was lowered to $600 from the previous $20,000 or 200 items. That difference drastically impacts smaller sellers, who will now have to report their online earnings as taxable revenue.
Form 1099-K isn’t one that’s filled out and submitted to the IRS. Rather, it’s sent to online business owners by the payment processor to notify them of the revenue they’ve received electronically through the payment platform. It’s a double-check to ensure that the company’s internal records reflect the same amount. The online revenue is then reported on Schedule C when taxes are prepared and filed.
If you have an online business on Etsy, Amazon, eBay, or another digital shopping platform, it’s wise to seek the guidance of a trusted CPA or tax preparer. A certified tax professional will help keep you out of trouble, providing valuable insights and ensuring that your business is compliant with all IRS regulations, including those around online revenue..
At Adams Accounting Solutions, we deal with this kind of issue every day. We’re experts in small business tax accounting, and we’re here for our clients when they need help, answers, or someone to hold their hand. Call today to schedule a consultation. We’ll help you figure out what to do with Form 1099-K — and all your other tax forms too!
It may seem early to broach this subject, but tax season will be here before we know it. As individuals and business owners wind down the current year and start organizing financial documents and gathering receipts, they’re confronted with the age-old question: Should they hire an accountant this time or try to do their taxes themselves?
It’s a conundrum. Small business owners often have more complex tax needs than individual taxpayers. For them, it makes sense to hire someone intimately familiar with the IRS tax code. While it sometimes hurts to pay a CPA to prepare and file your taxes, it’s often better than the alternative: missing something that might leave money on the table or result in you owing hundreds of dollars in interest, fees, or penalties.
Individual taxpayers also benefit from professional services. Accountants find ways to minimize tax liability by taking full advantage of the IRS tax code, listing as many deductions as possible for the best financial outcome. On the flip side, it could make sense to prepare your taxes yourself if your situation is fairly straightforward.
One option for those who want to prepare their taxes independently is IRS Free File, an alliance between the government and several private-sector tax preparation software providers. The program has been around since 2003. In spite of that, only 2% of taxpayers use it, according to industry specialists.
IRS Free File allows taxpayers to prepare and file their federal taxes at no charge through a portal on the IRS.gov website. Behind the web page interface is a bevy of tax providers offering free online tax preparation and filing services. The Free File program has restrictions and income thresholds attached to it, so it doesn’t work for everyone. But for those who qualify, it’s a viable option.
Two types of tax help can be obtained through IRS Free File:
When first implemented, IRS Free File only provided taxpayers with free filing services for federal tax returns. However, a change in the program’s reach now extends it into 22 states and Washington D.C., allowing residents to use the program to file state tax returns in addition to federal returns. According to irs.gov, Free File state partners charge a fee for the state filing unless otherwise noted. At the time of writing, Missouri is an eligible Free File state; Kansas is not. For an updated list of states participating in the Free File program, click here.
This brings us full circle. Just because you can file your taxes for free on your own, does that mean you should?
This is a question every taxpayer has to answer for themselves. Doing your taxes on your own is a viable option for individuals with straightforward tax situations. Many user-friendly software programs and online resources help make the process relatively simple. However, if you choose this option, you need to have a clear understanding of tax laws and regulations to ensure accuracy in your filing and avoid potential penalties or audits.
Conversely, enlisting the aid of a tax preparation specialist is advantageous if you have more complex investments, portfolios, or business interests. Tax professionals offer valuable insights you don’t get when working alone. They identify potential deductions and credits often overlooked and provide guidance on tax planning strategies to help you meet future financial goals. While this option costs more than doing your taxes on your own, the benefits greatly outweigh the cost.
If you’re on the fence about whether to get help preparing and filing your taxes this year or not, give us a call at Adams Accounting Solutions. We specialize in all aspects of tax preparation for individuals and small businesses. We can walk you through the pros and cons and help you make the best decision for your situation. Give us a call today!
Here it is, the beginning of the fourth quarter. This is the time when many entrepreneurs start examining the books more closely to determine where the business will land at year-end. They assess expenses, balancing them against revenues and hoping the latter outweighs the former.
Of course, some seasoned business owners know what it takes to run a profitable company. They’ve likely kept tabs on all this during the year. They’ve learned that constant assessment of their financial situation leads to fewer surprises at the end of the year — and also at tax time.
As crazy as it sounds, tax time is just around the corner. Why not start now to get things in order so that when it’s time to prepare your taxes next spring, there’s less stress involved?
Here are a few pointers to get you started from the experts at Adams Accounting Solutions.
Filing extension deadline: October 16, 2023, is rapidly approaching. This is the deadline for tax filings for individuals who filed an extension back in April. Keep in mind that the tax extension only gave you extra time to file your return; it did not extend the time you have to pay what you owe. If you didn’t pay anything in April when you filed your extension, you’ll have to pay now and include interest and filing penalties, too.
2022 401(k) contribution deadline: October 16 is also the deadline for contributing to 2022 self-employment retirement plans, including SEP and Simple IRAs. If you filed on time for an extension, you have until October 16 to make your final contributions to these plans for 2022.
Remember that retirement accounts are an investment in your future. Contribute as much as you can each year to maximize this financial tool.
Estimated tax payments are those made by self-employed individuals or entities that earn income that’s not subject to federal withholding. This doesn’t mean the income isn’t taxable; it just means that taxes aren’t withheld from a paycheck as they would be if you worked for someone else. Freelancers, contractors, and other self-employed individuals are subject to quarterly estimated tax payments, as are certain types of businesses.
Quarterly estimated tax payments for the 4th quarter aren’t due to the IRS until January 16, 2024. But tax experts recommend paying them in the quarter in which the income is earned. By submitting the Q4 payment before December 31, you’re simplifying the bookkeeping process. In this way, there’s no debate over which year the payment applies to.
At Adams Accounting, we know you have your hands full trying to run your business. We’re here to make your life easier. We specialize in tax planning and preparation for small businesses. We also offer business consulting services.
Give us a call if you have tax-related questions throughout the year. We’ll help keep you on track so that next year’s tax season is a breeze!
Many investors are getting into real estate these days. Some are experienced and know what they’re doing; others are newbies. Either way, these investors have a lot to consider at tax time.
A 1031 exchange is an excellent tool for deferring capital gains taxes when it’s time to sell an investment property. But what, exactly, is a 1031 exchange? And why would you use it? Read on to learn what you need to know before going too far into investment property transactions.
A 1031 exchange is a swap of one investment property for another. This transaction lets you sell one piece of real estate and reinvest the proceeds in another piece of real estate. Typically, this type of transaction would be taxable as a sale, but under a 1031 exchange, you can defer tax payment to some point in the future — as long as you abide by all the guidelines associated with a 1031 exchange.
A 1031 exchange involves selling your current property, identifying a replacement property, and then purchasing the new property with funds from the sale of the old property. The transaction is handled through a qualified intermediary, an independent third party with no ties to either the buyer or seller. This third party holds the money from the sale of the first property until the second property is located and purchased.
The benefit of this type of real estate swap is that it helps you grow your portfolio without the tax burden associated with that growth. There’s no limit to how many 1031 swaps you can do, but at the end of the investment period — when you’re ready to sell the final property for cash — you’ll pay taxes once at the long-term capital gains rate, currently 0%, 15%, or 20% based on your income.
As of 2018, the rules for 1031 exchanges changed, stating that only investment and business property are eligible for a 1031 exchange. Prior to this, the rules allowed for other types of personal property in the exchange, including franchise licenses, yachts, artwork, and machinery. Personal residences don’t qualify, nor do vacation homes — except possibly in certain circumstances. Consult with a tax professional before leaping into this type of transaction.
A 1031 exchange requires that the replacement property be similar to the current property. The IRS calls this like-kind property. The new property must also be identified in writing within 45 days of the sale of the existing property, and the purchase must be completed within 180 days. The two timelines run concurrently, so once the clock starts ticking, it’s imperative that you keep moving. If any of these rules are ignored, or any part of the exchange is mishandled, you may lose the tax deferment benefit, resulting in a tax liability on the capital gains from the sale of the original property.
The primary benefit of a 1031 exchange is to increase the overall value of your real estate portfolio while deferring taxes on that increase. For example, if you have a smaller rental property, you could use a 1031 exchange to sell it and purchase a larger, more valuable property that could provide you with more monthly rental income.
It’s a good idea to consult a tax professional before engaging in a 1031 exchange. The rules are complicated and have a lot of moving parts. A CPA will ensure that you’re following all the guidelines for a 1031 exchange and remaining within the bounds of the law so you don’t have any unpleasant surprises at tax time.
Adams Accounting Solutions knows all the rules and regulations involved with 1031 exchanges and can guide you through the process to make sure you get the full impact of the capital gains deferral. Give us a call with questions or to schedule a free consultation. We’re here to help!
Every entrepreneur knows they must file taxes when starting a new business. Even if they’re unsure about the details of spreadsheets, expenses, and taxable deductions, most business owners realize that a portion of their hard-earned money must go to the government. It goes with being a business owner.
But what happens if you don’t make any money that first year? In fact, what if you lose money instead? Do you still have to file a tax return?
The short answer is maybe. There are a few rules and restrictions to consider before moving forward, but filing a tax return when your business breaks even or loses money may be to your advantage.
If your business lost money during the year, you may be able to deduct a portion of the loss on your tax return. Much of how this works depends on your business’s legal setup. Is it a partnership, sole proprietorship, LLC, or full-blown corporation? The IRS has rules in place for each of these structures. The formula also depends on any other income you have. Perhaps you’re still working part-time while you get your new business up and running. In that case, your part-time earnings will figure into the picture.
When it comes to the IRS, everything good seems to have a limit. That’s true for deducting business losses, too. When your business operates in the red, you can’t just deduct the total loss amount on your tax return. It’s not that simple. The IRS limits the amount you can write off in a year based on several factors and has put guidelines in place to help business owners calculate how much of the loss they can deduct.
Here are a few rules and restrictions you should be aware of:
There’s another way to benefit from business losses, and that’s to carry them into the next tax year. You’re essentially deferring some of the deduction and claiming it in future years, thereby spreading out the impact of the loss. But there’s a catch: You can typically only use up to 80% of your taxable income to offset these losses. The good news is, there’s no limit on how many years you can do this.
You may think that if your company breaks even, you don’t need to file a tax return. After all, you didn’t make any money, right?
That’s not necessarily the case. Even when your company breaks even, you may be required to file a tax return with zero revenue. Much of the decision depends on your business structure. For instance, if you’re a sole proprietor, you may have incurred business expenses during the year that are deductible. In that case, you’d want to file a Schedule C, even if you have no revenue to declare for the same time period.
Your accountant can help you sort through the options if you have no revenue in a tax year.
Still wondering whether you should file a tax return or not? Call Adams Accounting Solutions for a consultation. We’ll discuss your situation and help you determine the right course of action for your business needs. The sooner you know your options, the sooner you can let go of the worry and focus on running your new business. Call today!
The IRS is much maligned, especially during tax time, when taxpayers are scrambling to get tax documents together, business owners are tallying up expenses and gathering receipts from the year, and accountants are trying to decipher all the tax code changes that occurred in the past 12 months. But the IRS isn’t all bad. Sometimes good things come from this organization.
It’s a rare person who wasn’t moved by the images of the wildfires that devastated Maui, Hawaii, last week. News reports painted a grim picture as firefighters worked to extinguish the flames and relief workers attempted to find people trapped in the debris before it was too late to save them. Despite these efforts, more than 114 people have died in the flames, with the potential for more to be added to the toll as rescue workers locate missing people during their cleanup efforts.
The citizens of Maui have been through a lot, and many organizations here on the mainland are coming up with ways to help. The government is one such entity. Most people aren’t aware that when disasters like this occur, the federal government can grant tax relief to those most impacted. On August 18, the IRS announced that it would provide tax relief to victims of the wildfires in Hawaii.
Publication 547 of the IRS code allows for tax relief for business owners and individuals impacted by a casualty. In this case, a casualty is defined as “the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.” The wildfires in Maui certainly qualify. The area has been declared a federal disaster area by the Federal Emergency Management Agency (FEMA), and this disaster designation qualifies impacted households and businesses for certain types of relief from tax filing and payment deadlines.
For the citizens of Maui, returning to their regular daily routines is out of the question — at least for the foreseeable future. Many are without homes or employment. Many other more pressing survival needs take precedence over getting taxes filed on time. The IRS declaration gives these residents time to pick up the pieces and sort out their lives before worrying about getting hit with penalties for filing a tax return late.
Taxpayers who owe filings and payments due on October 16, 2023, now have until February 15, 2024, to get those documents and payments into the IRS. The extension applies to the following scenarios:
In addition, certain other penalties may also be reduced.
Taxpayers in the affected area don’t have to do anything to qualify for or receive this tax relief except have an address in the FEMA-designated disaster area.
Adams Accounting Solutions handles tax returns for clients throughout the country. It’s our job to stay on top of situations such as this one and advise impacted customers on how to proceed tax-wise.
If you have questions about how a natural disaster might impact your tax situation, give us a call. You can also call with any other tax-related questions. We’re here to make the tax preparation process easier and less stressful for you. And if disaster strikes, we’ll be here then too.
Do you feel like you’re no longer in control of your personal data? If so, you’re not alone. Many others have that same suspicion and for good reason. There are plenty of ways your personal information can be compromised these days, many of which are legal, if not always ethical.
Consumers expect that their personal data will be used for the intent for which it was given by the companies they gave it to unless otherwise stated in the company’s terms and conditions or privacy policy. But most people don’t read those documents before agreeing to the arrangement. They just click through the screens to get signed in, handle their transaction, and cross the task off their to-do list.
This begs the question: What happens when they discover that a company that handles sensitive financial data — like a tax software preparation company — has transmitted their personal information to a third party?
Users of several tax preparation software applications, including H&R Block, TaxAct, and TaxSlayer, find themselves in this situation. These three companies have been accused of quietly collecting and sending client information to Google and Facebook (Meta) when taxpayers file their tax returns electronically, according to a July 2023 Congressional report.
This shared data is supposedly anonymous, but data experts believe that by stringing certain characters together, it’s possible to determine the users’ identities. In some cases, the data includes income, filing status, tax refund amounts, dependents’ names, and approximate federal taxes owed, according to an article on TechRadar.com.
Facebook receives this information through tracking pixels. According to Facebook’s website, the Meta Pixel is a piece of code that businesses can put on their websites to collect information about the actions taken on the website. The collected data is then transmitted to Facebook to be used in targeted advertising. Google collects information similarly through Google Analytics, which many companies use to track traffic to their website and monitor their ranking in Google search results.
Needless to say, this practice of collecting and sending taxpayer data to third parties is both unethical and illegal. Legislation states that “a tax return preparer may not disclose or use a taxpayer’s tax return information prior to obtaining a written consent from the taxpayer.” Failure to comply may result in fines of up to $1,000 and a one-year prison sentence for each case.
If you must file your taxes online, use an anonymous browser. A quick Google search (ironic, yes) will bring up several free ones. All you have to do is download the browser and install it on your laptop. Once complete, you can safely take care of business without the fear of being tracked or having your information sent elsewhere. Remember to change your browser settings on your computer so that the new browser is the default.
Another benefit of using an anonymous browser is that it gets rid of all the junk ads that typically pop up during web searches.
Even better than an anonymous browser are the tax professionals at Adams Accounting Solutions. We take your privacy seriously. We don’t use tracking pixels on our website, nor do we ever share our clients’ information with anyone else.
If you want a safe and secure tax-filing experience, give us a call. We’ll never sell you out. Your financial data is safe with us!
Nearly everyone dreams of winning the lottery. The dream takes different shapes for different people. One may hope to win enough to pay credit cards or medical bills. Another may have a grandiose vision that includes million-dollar mansions and fast sports cars.
The idea of suddenly becoming a multi-millionaire is enough to send anyone’s imagination into overdrive. But what happens when that dream becomes a reality? Someone has to win the jackpot. And that lucky person, whoever they are, will have to make some tough decisions.
One of the most critical decisions lottery winners face is whether to take the lump sum payment or opt for an annuity — a partial payment received each year. It’s a choice that has a significant impact on their financial future. And it’s a choice many people have no idea how to make.
When you win the lottery, you win a certain amount of money, often advertised as a lump sum. This is the total amount you’d receive if you took it all at once. Some lotteries also offer the option of receiving the jackpot as an annuity, where the prize money is paid out over several years. It’s up to the winner to decide which route they want to go.
A lump sum payment is the most common choice with lottery winners. It offers the immediate gratification of receiving a large sum of money upfront. With this option, you receive the entire jackpot amount at once, minus any applicable taxes or deductions. This is an attractive choice if you want to make significant purchases or investments immediately.
The benefits. There are several advantages to choosing the lump sum payment option. One is flexibility. With a lump sum, you can immediately control all your winnings and use them as you see fit. Another is the potential to grow your financial portfolio. With careful planning and a strategic investment strategy, you can make your winnings work for you, potentially increasing your net worth significantly.
The drawbacks. The lump sum payment also comes with downsides. One of the biggest is the temptation to blow the money all at once or otherwise mismanage it. Sudden wealth is overwhelming for most people. Without proper financial guidance, it’s easy to fall into the trap of extravagant spending or poor investment decisions.
A lump sum payment also has tax implications. Most people who receive a large sum of money all at once are immediately bumped into a higher tax bracket, resulting in a significant tax bill. Many states withhold taxes before issuing payment to the lottery winner. This helps ease the tax burden later. But it’s still crucial to consult with a financial advisor or tax professional to understand the tax implications of such a windfall and plan accordingly.
An annuity provides a steady stream of income over a specified period. Instead of receiving the entire jackpot upfront, you receive regular payments, usually on an annual basis, over several years. The length of the annuity varies depending on the lottery but often ranges from 20 to 30 years.
The pros. One of the significant advantages of choosing the annuity payment option is the security it offers. With a steady income stream, you can ensure a stable financial future. This is particularly appealing to those who are risk-averse or have concerns about managing a large sum of money.
Another benefit is the tax advantage it provides. By receiving the jackpot as an annuity, you may be able to reduce your overall tax liability. Annual payments are taxed at a lower rate than a lump sum, allowing you to keep more of your winnings.
The cons. One of the main disadvantages of an annuity is the lack of immediate access to the total jackpot amount. If you have immediate financial needs or want to make significant purchases, the annuity payments may not be sufficient to meet your needs.
Another drawback is the potential for erosion of winnings due to inflation. As the cost of living increases, the purchasing power of each payment decreases. This is something to consider if you have long-term financial goals or want to ensure that your winnings will last the rest of your life.
Winning the lottery is a life-changing event. When it happens, having the right team on your side is essential to ensure long-term financial stability. Adams Accounting Solutions is here to help you navigate the complex financial landscape that accompanies winning the lottery. We’ll help you figure out whether a lump sum payment or annuity is best for your situation and advise you of the tax implications of each option, so you can ensure your winnings last a lifetime — maybe even longer!
Richard Adams is a graduate of Benedictine College in Atchison, Kansas, with dual majors in Accounting and Business Administration. He is also a graduate of Wentworth Military Academy in Lexington, Missouri.