I inherited lots of money: What should I do?

My long-lost uncle recently passed away and I inherited a lot of money.  Not really, but wouldn't that be exciting?  I of course said long-lost because if it was someone you were close to this news would be heartbreaking!  Ok so I have a lot of money, what do I do with it?  Are there certain things that make more sense from a tax standpoint? 

What but what should you spend it on?  Should you go on a lavish vacation?  Well, sure you might as well, but what about something more practical?  If you are like most Americans you have debt.  You have credit card debt, car loans, a home mortgage, student loans, etc.  Remember interest you pay on your credit cards and car loans is not deductible at all on a tax return.  Interest paid on a home mortgage is deductible if you are able to itemize your deductions and student loan interest directly reduces your income.  Credit cards often times carry the highest interest rates and for your personal situation it would make the most sense to pay off those high interest credit cards.  If you can pay off everything then that is great, but if not, make sure you pay the items with the highest interest and the least tax benefit: credit cards and auto loans!  Keep in mind if you pay off your house and you previously could itemize, you may not have enough deductions to continue to itemize in the future without that mortgage interest. 

Other things to consider doing with the money is fully funding your tax deductible retirement plan, or perhaps donating to charity.  Charitable donations are another one of those itemized deductions, so if you have enough money you could consider investing the money and then contributing to charity each year an equivalent amount as to what your mortgage deduction would have been.

Bottom line if you inherit some money, find time to have fun with it, invest it wisely, and make good financial decisions.  You do not want to pay off all your debt to later learn you lost a lot of tax deductions and end up paying a lot in taxes.  Make sure you contact a CPA and a financial planner if you are ever so lucky!

 By: Tara West, CPA, CMA, CGMA