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Hot Lotto

Topic closed. 3 replies. Last post 1 year ago by mathhead.

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Salem, NH
United States
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May 19, 2013
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Posted: May 25, 2013, 7:18 pm - IP Logged

SO..........HOT LOTTO states grand prize paid "tax free". If someone wins the grand prize, would they not STILL be obligated to pay federal taxes ? Can a tax attorney or accountant please answer ? I can not imagine that the IRS would allow you to collect the winnings and NOT pay federal taxes. Help me understand, please.

    butch2030's avatar - DiscoBallGlowing
    The KEY ingredient is Combos & Patterns
    Elgin, IL
    United States
    Member #68867
    January 1, 2009
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    Posted: May 25, 2013, 8:13 pm - IP Logged

    To my understanding, they will pay your taxes for you using your SSN if you win the Grand Prize.  They will only pay taxes (State & Federal) on the money for the Grand Prize "ONLY ".  Any other taxes you may owe is your problem.  In short, if you didn't Win the Grand Prize, you are responsible for any taxes on any other prizes you may have won.

     

    MN Hot Lotto®

    Starting May 12, 2013, Hot Lotto goes ALL CASH and TAXES PAID (25% Federal, 7.25% State withholding)

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      Member #130800
      July 25, 2012
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      Posted: May 25, 2013, 8:15 pm - IP Logged

      SO..........HOT LOTTO states grand prize paid "tax free". If someone wins the grand prize, would they not STILL be obligated to pay federal taxes ? Can a tax attorney or accountant please answer ? I can not imagine that the IRS would allow you to collect the winnings and NOT pay federal taxes. Help me understand, please.

      It does not say it is "tax free".  It says the Hot Lotto lottery pays the (federal?) withholding tax.

      (I have not looked to see if any state taxes lottery wins; my state does not.  If your state does, I don't know if the Hot Lotto lottery would pay the state withholding.)

      As you should know if you work, withholding is merely an estimated tax payment.  Your actual tax might be higher or lower, depending on your individual circumstances.  Generally, you cannot know until you file your tax return due in Apr of the following year.

      Normally, the federal withholding rate on large gambling wins is 25%.  So if the advertised jackpot is $6,310,000 (today), the lottery will actually pay out $8,413,333 (probably rounded down to an even $100 or $1000).

      But don't be fooled:  any other lottery would have advertised a jackpot of $8,413,333, all things being equal.

      In any case, for large jackpots, you would likely pay 39.6% in federal taxes (the current max marginal rate).  And that would be 39.6% of $8,413,333, the actual payout, not $6,310,000.  So your total federal tax would be $3,331,680, of which the lottery paid $2,103,333.

      But to reiterate, that is only a rough estimate.  Your actual total federal tax might be higher or lower due to other income and deductions (as well as alternative minimum tax?  I have not looked).  And don't forget:  that includes tax on any interest or realized investment gains of the $6,310,000 that you actually received.

      PS:  And the total tax estimate assumes that you hold your payout in a personal account or a pass-through trust.  There are many alternatives that might reduce your total tax exposure, at least in future years if not also in the year you win.  I have not looked to see if lotteries permit you to designate those alternatives as the direct recipient of the initial payout.

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        Posted: May 25, 2013, 8:42 pm - IP Logged

        It does not say it is "tax free".  It says the Hot Lotto lottery pays the (federal?) withholding tax.

        (I have not looked to see if any state taxes lottery wins; my state does not.  If your state does, I don't know if the Hot Lotto lottery would pay the state withholding.)

        As you should know if you work, withholding is merely an estimated tax payment.  Your actual tax might be higher or lower, depending on your individual circumstances.  Generally, you cannot know until you file your tax return due in Apr of the following year.

        Normally, the federal withholding rate on large gambling wins is 25%.  So if the advertised jackpot is $6,310,000 (today), the lottery will actually pay out $8,413,333 (probably rounded down to an even $100 or $1000).

        But don't be fooled:  any other lottery would have advertised a jackpot of $8,413,333, all things being equal.

        In any case, for large jackpots, you would likely pay 39.6% in federal taxes (the current max marginal rate).  And that would be 39.6% of $8,413,333, the actual payout, not $6,310,000.  So your total federal tax would be $3,331,680, of which the lottery paid $2,103,333.

        But to reiterate, that is only a rough estimate.  Your actual total federal tax might be higher or lower due to other income and deductions (as well as alternative minimum tax?  I have not looked).  And don't forget:  that includes tax on any interest or realized investment gains of the $6,310,000 that you actually received.

        PS:  And the total tax estimate assumes that you hold your payout in a personal account or a pass-through trust.  There are many alternatives that might reduce your total tax exposure, at least in future years if not also in the year you win.  I have not looked to see if lotteries permit you to designate those alternatives as the direct recipient of the initial payout.

        Errata....  I did not get a chance to make the following changes before the edit window closed.  I should have written....

        So your total incremental federal tax would be $3,331,680, of which the lottery paid $2,103,333.

        But to reiterate, that is only a rough estimate.  Your actual total incremental federal tax might be lower due to deductions and credits.  And don't forget:  your incremental federal tax might be higher due to tax on any interest or realized investment gains of the $6,310,000 that you actually received.

        (I had mentioned the AMT before.  Although that might increase your total tax, it cannot increase the incremental tax estimate above, since I base that on the max marginal rate.  And again, I did not look to see if AMT is even affected by large gambling wins.)