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From the Financial Hotline

By: Financial Hotline
Summer 2022 (Vol. 40, No. 2)

Q: I just received an unexpected large amount of cash. Any advice on what to do with it?

A: A cash windfall is any amount of money that you didn’t expect to receive and is over your regular income. Even if you didn’t just get cashed dropped in your lap – its good to have a plan ready in case that happens. The first thing to remember is do not rush into anything. A key question to ask is “Will I owe any taxes on this windfall?” A gift or inheritance usually doesn’t have tax consequences but gambling or prize winnings, a bonus at work or a stock or crypto sale profit may mean a future tax bill.

Next, look at your personal finances. If you need to, now is the time to build an emergency fund, pay off high interest and credit card debt, pay off a mortgage or put a down payment on a home or investment property. I realize it may be more exciting to dream of splurging n a once in a lifetime vacation but remember if you eliminate debt payments you may be able to afford more luxuries every month instead of a one-shot deal.

If you still have money left over, maximize contributions to or start investing in Tax-Efficient Investment Accounts such as 401(k) retirement plans, 529 education savings plans, health savings accounts (HSAs), and IRAs. Investing in these types of accounts could lower your tax bill now, but keep in mind that if you need the money sooner rather than later, you may need to pay penalties and taxes. Which tax-efficient investment accounts to contribute to depends on your financial situation. If you are retired, you can no longer contribute to a 401(k), but if you have grandchildren, you can contribute to a 529 education plan. If you are still in the workforce and your employer offers a high-deductible health plan, consider maximizing your 401(k) contributions if you aren’t already doing so, as well as contributing to an HAS to help pay for healthcare-related expenses you might incur now or in the future.

If you have covered all these basics – Congratulations! Take those extra funds and splurge on whatever your dreams hold!

Q: What is an I-Bond?

A: I-Bonds are U.S. savings bonds issued by the United States Treasury. The interest rate is adjusted every six months, in May and November. Currently, I-Bonds purchased through November 2022 are paying 9.62% on an annual basis for the first six months they’re held. The interest rate will be adjusted in November based on inflation. Individuals purchase I-Bonds from Treasury Direct. There is a maximum of $10,000 per person per year (each spouse can purchase $10,000 for a total of $20,000). The minimum age for purchasing these bonds is age 24, but parents can gift the bonds to their children (age 18 and under).

I-Bonds must be held for a minimum of one year; if redeemed before five years, three months of interest is forfeited. Interest income is exempt from state and local taxes but is subject to federal tax - unless the bonds are used to pay for qualified education expenses.

Q: Is summer camp for my kids a tax deduction?

A: Day camps are common during school vacations and the summer months. Many parents enroll their children in a day camp or pay for daycare so they can work or look for work. Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit. There are several criteria but most parents can claim this deduction. Here are a few requirements: Your expenses must be for the care of qualifying persons such as your dependent children under the age of 13. The care expense must be work-related. In other words, you must pay for the care so you can work or look for work. You must have earned income such as wages, salaries and tips. You must also file a joint return if married but you can still take the credit, however, if you are legally separated or living apart from your spouse.