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Old 01-14-2016, 03:59 AM   #1
scott-pati
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Interesting article on taxes for the lottery

Thought I would share this. Seems like if your not really careful, winning the lottery can be a huge pain.

Taxes on a $1.4 billion Powerball jackpot could be $400 million

By Bill Bischoff - MarketWatch - Monday, January 11, 2016


The next Powerball drawing is worth an estimated $1.4 billion (it may be even higher by the time you read this), and the odds are good that there will be a winner this time.

If there’s only one, we will have a new member of the billionaire club. Right? Wrong, because your friendly tax collectors are silent partners in the deal. Here’s the story on all the tax hits on a huge payout.

Annuity versus cash option

As I write this, the projected jackpot for the Jan. 13 Powerball drawing is a whopping $1.4 billion. But that number is based on the winner taking his or her money in the form of a 29-year annuity. You get the first payment right away, and then one annual payment for the next 29 years. On the other hand, if you choose the cash option, you get all the money right away, but you get less. The projected cash-option jackpot is “only” $868 million. What’s the biggest reason to choose one option or the other? You guessed it: Taxes.

If you choose the annuity option and then die before collecting all your rightful proceeds (a distinct possibility if you are not a youngster), the present value of the remaining payments will be included in your taxable estate for federal estate tax purposes. The first $5.45 million (indexed for inflation in future years) will be sheltered by your federal estate tax exemption, but anything in excess of that amount will be taxed at a 40% rate. Depending on where you live, there may be a state death tax hit, too. Your heirs would have to figure out how to pay the tax hit(s) on money they have not yet received. I’m sure there are ways to borrow what’s needed to pay death taxes, but I doubt those ways are cheap. So if you’re not a healthy millennial, the cash option could be the better choice, despite what you might read elsewhere.

And if you’re a youngster in robust good health, and choose the annuity option — but you live in a high-tax state like New York, Massachusetts, Minnesota, or Oregon (oddly enough, California does not tax lottery winnings) — can you move to Florida or Nevada or Texas, which have no personal income taxes, and thereby avoid any state income tax hit on your future lottery annuity payments? It depends on the laws of the state where you currently reside. This is a question to be researched by your newly hired tax professional (more on that later).

Federal income tax

Lottery jackpots are fully taxable. And big jackpots are taxed at the maximum federal rate of 39.6%. On an $868 million cash payout, the federal income tax hit would be about $344 million. Ouch! Federal income tax will automatically be withheld from your prize, but only at a 25% rate. So on an $868 million payout, you would still owe the federal government almost $127 million. You have the same underpaid tax issue if you receive big lottery annuity payments, but the underpaid amount for each year is much smaller. In any case, failure to recognize that additional tax is still owed on lottery winnings is one big reason why some winners wind up in bankruptcy court a few years later.

State and local income tax

Say a big lottery winner is “unlucky” enough to live in a state with a personal income tax. In most states, the tax rates on high-income individuals range from 5% to 10%. If the rate is 7%, the winner of an $868 million cash payout will owe the friendly state tax collector about $61 million. But if you live in New York City, you face an 8.82% state income tax rate plus another 3.876% for city income tax. Oof! The state income tax rate in Massachusetts is an oppressive 12%, and the 11% rate in Hawaii is no bargain. Depending on where you live, automatic withholding of state and local income taxes may or may not occur. So another big reason why some lottery winners wind up bankrupt is failure to plan ahead for these tax hits.

Federal gift tax

Despite having already lost many millions to the Feds (and maybe to your friendly state and city tax collectors, too), your tax situation can quickly deteriorate even further if you share your newfound wealth generously with friends and loved ones. That’s because you’ll owe the 40% federal gift tax after you’ve given away more than the $5.45 million federal gift tax exemption (adjusted for inflation in future years). Say you give away $25 million to siblings, children, parents, aunts, uncles, and friends. The gift tax bill would be about $7.8 million. So please don’t give away anything until you’ve talked to your newly hired tax pro.

Death taxes

Now let’s assume that you don’t give away any of your $868 million cash jackpot. You just pay your $344 million tax bill to the Feds and your $61 million state tax bill. So you have $463 million left ($868 million - $344 million – $61 million). That should be more than enough to at least last for the rest of your life (I hope).

But if you massively overindulge and die of a heart attack later this year, your estate will owe a $183 million federal estate tax bill [40% x ($463 million – the $5.45 million exemption)]. Of the $868 million you started off with, $280 million is left. That means almost 68% has been lost to taxes. Ouch! If your state income tax rate is higher than 7% or if your state charges a death tax, it could be even worse. So don’t tell me the rich don’t pay enough in taxes. That said, I’m still open to winning the Powerball.

The bottom line

If you’re lucky enough to become a really big lottery winner, please take my advice: Hire a super-competent tax pro, a super-competent attorney, and a super-competent financial adviser the next day. Then don’t do anything with your money until you’ve talked to all three. That way, your big jackpot will be a blessing instead of a curse.
 
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Old 01-14-2016, 04:33 AM   #2
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Are you posting this for the one out of 292 million that might win? I think all of this (over) reaction to a big lottery is hype. Why worry my aching little head with something that is not going to happen to me. Someone said: "The lottery is a tax on people who don't understand math."
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Old 01-14-2016, 04:49 AM   #3
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I just find it interesting on how much our government takes and takes and takes, even when you die! Just makes me sick...
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Old 01-14-2016, 05:10 AM   #4
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Also interesting how many people win millions in the lottery and end up broke in a few years. I actually worked with a guy that won $20 million in TX lotto in early 90's. No lump sum then. Paid annually for 20 yrs. Wife divorced him shortly afterward and took her half. He got something over $360K each year after taxes. Got his last payment 2-3 yrs ago. Now broke. Last I heard he was working at Home Depot. But said it was great while it lasted.
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Old 01-14-2016, 05:40 AM   #5
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Interesting post for sure but do not think I will save it but rather worry about how to manage my winnings should that ever happen in my lifetime.

Personally a couple hundred grand to a million would be nice and would not change my current happy life much but to win several million dollars would probably turn things upside down to the point of no return to my current happy life.
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Old 01-14-2016, 07:29 AM   #6
Artemus Gordon
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Yes, I don't want to worry about a horrible burden of winning the lottery! Therefore I just don't buy tickets. The aggravation would kill me then there goes the winnings.....
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Old 01-14-2016, 11:42 AM   #7
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If they took it all and only left me with a couple of million I think I could get by. I'm one of those takers who demands that my government pay for all those socialist ideas like snow plows and disaster relief and cops and service men and women and I really appreciate them taking a bunch of the cost of it from someone who just won way more than they need than taking more from me. Just selfish I guess.
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Old 01-14-2016, 11:46 AM   #8
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I would not want all that money either. To much of a hassle. A few 100k's for me would work just fine.
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Old 01-14-2016, 12:11 PM   #9
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Well if taxes will get it all I'm not going to buy a ticket.
Truth is. I never made a lot of money but I don't need much and could care less about having a lot of money. Win the lottery not me I don't care.
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Old 01-14-2016, 01:27 PM   #10
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But..Some one will win and it could be you..if you buy a ticket.
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Old 01-14-2016, 01:51 PM   #11
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And now for the real truth. And the actual winner is of course the government. Feds come in first with states grabbing what they can and supposedly some county's and city's grab a share of your good fortune. Of course they need to redistribute that money.
On the bright side if you don't win you won't have to worry about getting struck by lightning 29 times or what ever those odds of winnings happen to be. :-) :-)

I guess I will continue to work and support the government coffers in the regular way.

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Old 01-14-2016, 03:38 PM   #12
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Really now, is it worth buying a ticket now that the BIG ONE has been won?!!? I really think I would take the beginning amount again if I bought a ticket. I think I could live off of $40million IF I really had to. They say the first things to do if you are a winner is to disconnect your phone/s, stop your mail service, don't answer the door, rent something away from your house, contact a good lawyer, contact a good tax man/woman, and contact a good financial adviser like has been said earlier. The first thing I would do is keep my mouth shut on winning and do all the above. Then take my lotto ticket into the State Lottery office at the latest possible date I could and still be able to claim the winnings.
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Old 01-15-2016, 02:16 AM   #13
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^ Agree totally!

But waiting to the last possible date does nothing. Your winnings are still public records, if anything the press would love the story as "Lottery winner waits for last day to collect winnings". You can not hide from it unfortunately.

I put the phone system in the lottery in Harrisburg, PA. I saw the room with the spinning drums that are used for the drawings, which was cool to see. Also on occasion, a lottery winner would show up in a limo with a news crew waiting in the parking lot.

They made the scratch off ticket there as well. Super tight security.



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Old 01-15-2016, 03:43 PM   #14
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Scott there are several States that you can remain in the shadows and not be named to the press. Unfortunately, to many people want to be in the news and etc. That is really a dumb move since there are to many others that will definitely take advantage of that!
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Old 01-15-2016, 03:55 PM   #15
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Some of the states that do not allow the person to remain anonymous do allow the prize to be claimed by a trust. And the trust can be named anything the person wants, even a name that does not directly relate to the winner, WXYZ Family trust for example. Someone does have to appear in person to claim the prize, but that person can be a trustee of that trust.

I don't play often. But if I won it would go into a trust, and no one would ever know. Maybe not even my kids until I died.
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Old 01-24-2016, 03:15 AM   #16
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The question that we didn't see answered here is that if your domicile is in one state and you buy a winning ticket in another, who gets to siphon away your winnings? Your home state or the state where you bought the ticket or both?
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