When the rightful owner of unclaimed money, property or assets cannot be located, it will eventually be turned over to the government. Typically, this happens after one year’s time, though it may vary by state. To find unclaimed assets, beneficiaries must search government databases, then file a claim proving a particular asset belongs to them.
While it can be very exciting to discover unclaimed assets belonging to you or to a family member, it’s important to remember that claiming something of monetary value is likely to trigger a tax implication. Here are a few things to know about finding unclaimed assets that belong to you, and what it could mean for your finances.
Timeline for Taxation
First, the United States government has a blanket rule that income must be subject to taxation during the year it is recognized. So, while it is a good thing that you haven’t been taxed on unclaimed funds you didn’t even know about, it means that recognizing and claiming assets that were previously unclaimed will mean owing income tax on their value.
More often than not, we are all obliged to pay taxes on newfound cash or other cash-value assets.
Types of Unclaimed Assets that are Taxed
Most often, people locate unclaimed assets from the government, like tax returns, or from their employers in the form of paychecks or retirement accounts. Many, though not all, of these assets will be subject to tax. For instance, you can expect to pay income tax on bond interest, mortgage insurance refunds, pension funds and private retirement accounts like 401(k) and 403(b) accounts that you choose to liquidate. Less common assets that will also be subject to income tax include credit union shares, money from bank failures or funds from class action lawsuits.
Types of Unclaimed Assets that are NOT Taxed
If you locate unclaimed funds of a type not listed in the above section, you may be lucky enough not to owe any income taxes. If you invested in municipal bonds, for instance, you won’t owe income tax. If you locate a tax-advantaged retirement account like a 401(k) or an IRA and you keep it intact rather than liquidating, you won’t owe any income tax either. State and federal tax refunds you might locate are also tax-free.
Your Tax Rate for Unclaimed Funds
It can be tricky to determine what your tax rate will be for a newly-discovered unclaimed asset, as it depends largely on the type of asset you’ve claimed. Most types will be treated by the IRS as regular income, meaning you’ll be taxed at your usual income tax rate. If the funds you have located are from a past investment, your taxes will be assessed at the capital gains rate. State taxes may also apply.
Sometimes, you may be lucky enough to find an unclaimed asset with substantial value – though it could be unlucky if it pushes you into a new income tax bracket. If you find yourself in this scenario, you might find tax relief by donating a portion of your new-found funds to a registered non-profit so that you can use it as a write-off.
If you’re lucky enough to locate unclaimed funds that belong to you, make sure you understand what this means for your overall finances. Take heed of any tax implications and ensure you plan properly to pay what you owe.