Individuals may have financial windfalls because of a variety of occurrences. Some windfalls result from good fortune, such as winning the lottery or selling a business, while others result from bad fortune, such as medical malpractice or an inheritance. Either way, there are tax consequences to consider. Some consequences are immediate, while others have a long-term impact.
Immediate Tax Consequences
The receipt of a windfall may be taxable or tax-free. The general rule is that income from whatever source derived is includible in gross income (Code Sec. 61). However, there are various exclusions that transform some recoveries into tax-free income.
