What to do to minimize taxes on a prize in the US

Question

I won a $30K prize from a challenge where the institution did not withheld any taxes. Before the year ends I would like to know what steps I can take to minimize the taxes I have to pay, what options do I have? (in the US).

Answer 1

If you want to minimize the penalty for not withholding any of the prize, then you can either send in an estimated quarterly tax payment, or increase your tax withholdings with your employer for the remainder of the year.

If you want to reduce the tax, then you need to either save the money in tax-advantaged accounts like an IRA (which is not taxed until you withdraw the money) or an educational savings account like a 529 or Education IRA, which are deductible at the state level by many states, but not the federal level. Or you can spend is on tax-deductible things like charity.

(I'm sure there are other legal tax avoidance strategies, but those are the main ones that come to mind)

Note that you should not spend it on items just to get the tax break. i.e. you should NOT keep a mortgage just to deduct the interest. It makes no sense to to spend $800 a month on mortgage interest to save $200 in tax. And don't spend $10,000 in solar panels to get a clean energy tax break (if they even exist anymore).

Also note that the more practical use of the money may be to pay off debts. While you might save more this year in tax (assuming your marginal tax rate is higher than your interest rate), long-term you may be better off reducing your debt burden so you have more of your income to save and invest.