Each state in the United States, and many governments elsewhere, has a bureau that tracks lost or abandoned money and tries to connect it with its rightful owner. If you come upon unclaimed funds that belong to you, it may feel like your lucky day. However, this extra income may carry some tax implications along with it.
Unclaimed Funds Basics
Funds are unclaimed when money is in a bank account, or found as cash, and the rightful owner can't be identified or found. Some common sources of unclaimed funds include inheritances, life insurance, final paychecks, tax refunds and refunded deposits. If you suspect you have unclaimed funds out there, you can check with the appropriate department in the state where you think the funds are. There are also websites that offer to do this search for you, but their fees are rarely worth it.
Sources of Funds
The chief determinant of whether or not you will owe taxes on unclaimed funds is where the money came from originally. As a general rule, the money will be taxable only if it came from a taxable source. Life insurance benefits, for example, are rarely subject to taxation -- meaning an unclaimed life insurance payout is likely to be tax free. An unclaimed inheritance, however, will be subject to taxes. It's also relevant whether or not the money was taxed before you found it.
Your Tax Bracket
Unclaimed funds may not just be taxable in terms of the money itself. If you receive a large sum on unclaimed, taxable funds, it may push you into a higher tax bracket for that year. This means you will be responsible to pay a higher percentage of some of your income in taxes. If this happens, it may be advisable to make a charitable donation to a licensed nonprofit to lower your taxable income to a more advantageous bracket.
Tax Law Caution
Tax law is very complex, and carries severe penalties for making mistakes. If you have any questions at all about the tax status of unclaimed funds you plan to collect, consult with a tax professional. An accountant or a tax lawyer are the best choices for this kind of help. They will be able to advise you on the legal status of your funds and the best way to optimize your situation to keep the most money. Tax professionals also carry errors and omissions insurance -- they pay the cost of any mistakes made because of their advice.