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Tax on interest question

Topic closed. 12 replies. Last post 11 years ago by sirbrad.

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PA
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Posted: March 15, 2006, 12:38 am - IP Logged

Anyone know how much tax is assessed on interest? Say you invested $10 million at a 4% return. Also how quickly do you receive the first interest payment, the end of the month, or immediately? I think the interest amount would be something like $400,000 a year, and $33,333 a month at that rate. So how much would go for taxes?

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    Columbia City, Indiana
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    Posted: March 15, 2006, 1:06 am - IP Logged

    Currently, the federal tax on long-term capital gains (366 days or more) is capped at 15%.

    If you set up a trust immediately following your major win, your ten-million-dollar jackpot would pay you $340,000.00 per year net, minus any state and local taxes, which can vary widely.

    However, by putting part of it into carefully selected municipal bonds, it's possible to reduce your tax burden to almost nothing. In the past, munis weren't considered to be good investments on a large scale, but they're gaining popularity in today's market as viable tax shelters.

    Real estate is also a very sound financial haven, but stay away from REITs, or Real Estate Investment Trusts, for the time being. If you plan to park any part of your fortune in physical land, be prepared to travel in order to inspect your investment personally. If you can find it, buy undeveloped lakefront property and hold onto it for a few years, or buy urban rental units in major cities. In this case, you want to buy in areas which will support your mortgage. Again, know what your buying, and take the trouble to inspect it personally.

    Of the two choices listed above, I would recommend the lakefront land. I bought two undeveloped lots just three years ago, and they've already more than doubled in value.

    Come, Pinky; we must prepare for tomorrow night...

    Jim

      sirbrad's avatar - Lottery-062.jpg
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      Posted: March 15, 2006, 7:13 am - IP Logged

      Thanks for all that info Jim695. How often is interest paid, the first month? Yearly? I never invested in anything before, so what do people mean by "risks?" Is there some chance that you could lose all your money? How do you know what is a safe investment, and what is not? Is there where financial planners, and advisors come in? Are "they" even a good investment?

      Can you legally make sure that you do not lose any money, or get it back if you have to legally? What is the highest yielding investment out there? As well as the highest yielding/safest? Taxes and investing are the only things that seem to confuse me, as I never had the money required to really worry about either.

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        Columbia City, Indiana
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        December 9, 2003
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        Posted: March 15, 2006, 7:13 pm - IP Logged

        1). How often the interest is paid depends entirely upon how your trust is structured. You might elect to take your interest payments quarterly, bi-annually or annually. To take full advantage of the long-term capital gains tax, however, you should opt for the annual interest payment. You'll only be taxed on the interest earned, regardless of how often you draw it off; your principal is taxed only once, at the time you claim your jackpot. Provided you never dip into it, that principal will remain intact for the rest of your life, or longer if you so desire.

        2). Risk is determined by the volatility of your selected market. High volatility=high risk, but will also return higher yields if you guess correctly and the market rises. On the other hand, if you're wrong, you stand to lose a substantial portion of your initial investment. Low volatility=low risk, and therefore will return a lesser yield, but then you won't lose much should outside factors adversely affect your investment. Commodities are highly volatile and therefore very risky, and yes, you can lose your entire investment if, say, you bought a December call on copper, and then a mine collapses with loss of life, causing all mines in the region to be shut down for a while. That's what I mean by outside factors affecting your investment. Blue Chip stocks, which include solid, dividend-paying companies like Coca-Cola or Johnson & Johnson, are normally considered to be very safe based on their history of past performance.

        As I write this, short-term CD's and bonds are paying a higher yield than their long-term counterparts, such as stocks, for example. At the same time, however companies which hold lucrative military contracts, such as Lockheed or Daimler-Chrysler, can be very safe and profitable during times of military conflict. Naturally, a labor strike at either of these companies would have an adverse effect on your investment, so you have to weigh that possibility against the degree of likelihood of the strike actually coming to pass. This is why research is so important in the investment world. 

        3). A good financial planner is worth his weight in gold. Typically, when hiring a financial planner, the old adage, "You get what you pay for" should be heeded, but not taken for granted. What I mean is that just because someone is a licensed financial planner and charges high fees doesn't make him your best choice. Select one who has a proven performance record, and then speak with a few of his clients before signing with him. Your banker or your attorney will be able to point you in the right direction to get you started. Keep in mind, though, that, like an attorney, a financial planner is only an adviser. That is, you have to let him know what your specific long-term and short-term goals are. It's his job to show you various ways of achieving those goals, but it's ultimately your decision to make. If you just dump ten million bucks into his lap and say, "Call me after you've doubled this," my guess is that your phone will be covered in dust and cobwebs before you get that call, assuming it ever comes. The news section on this  forum is full of stories of people who decided that taking an active part in their own financial futures was suddenly beneath their respective stations, or that it was simply too boring; after all, that's why they hired a financial planner. People who have sudden wealth thrust upon them tend to forget that they've won a finite amount of money, and they wrongly assume that it will never run out. Consequently, their entire fortune is gone in only a few years, and all they have to show for it is overwhelming debt and the memory of the dinner party they attended when they were able to boast of buying 100,000 shares of Mattel at 50.

        4). The only way to guarantee you won't lose any of your money would be to stuff your mattress with it and never get out of bed; any investment carries a degree of risk, simply because we don't know what the future holds. Companies fail; droughts, floods, hurricanes and other natural disasters happen at the most inconvenient times. All you can do is to minimize the degree of risk by sacrificing the possibility of higher returns with historically safe investment vehicles such as passbook savings accounts, CD's or physical real estate. Another effective way to reduce your risk would be to study the markets in which you're interested. The stock market is divided into sectors such as transportation, construction, durable goods and textiles, to name just a few. Select any of these and educate yourself on factors that might affect that sector. The transportation sector, for instance, is obviously affected by the price of gasoline, the federal wheel tax, natural disasters such as hurricanes (because a hurricane can and will affect insurance premiums), high-profile plane crashes, etc. It's important to know the market which you've chosen. Let it obsess you; allow it to occupy your every waking thought. It doesn't have to be boring. In fact, it can be quite exciting to be among the first to spot a major market trend, and then to watch the money roll in.

        I've said it before, and I still believe that the ideal time to speak with a financial planner is now, before you win a major jackpot. Doing it now gives you the rudimentary information you'll need to make responsible and profitable decisions when the moment comes. If you wait until after you pick up your check, you'll be distracted by a million thoughts running through your mind, and you'll make your decisions based on what you know at that moment, and that could prove to be a very costly mistake.

        The Motley Fool (www.motleyfool.com) has an excellent tutorial for first-time investors, or for people who just want to learn about investment vehicles. The service is free, and I would recommend it to all of my fellow members who want more information on investing their upcoming fortunes. What works for me won't necessarily work for you, so I can't give you any specific advice on where or how to invest your money, and I'm not qualified to do so; I'm not a licensed financial planner. I hope I've given you enough information to get you interested in investing, but there is no substitute for education. You might even consider taking a course on investing at your local community college. These classes can be found under "Adult Education" or "Continuing Education" in the college catalog. They're relatively inexpensive and generally take eight to ten weeks to complete (meeting one or two nights a week). While they're by no means comprehensive in scope, they will give you the necessary knowledge to make intelligent decisions when the time comes.

        Hope this helps ...

         

        Come, Pinky; we must prepare for tomorrow night...

        Jim

          sirbrad's avatar - Lottery-062.jpg
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          Posted: March 15, 2006, 10:39 pm - IP Logged

          That was a great post again, thanks. "As I write this, short-term CD's and bonds are paying a higher yield than their long-term counterparts, such as stocks, for example." I think CD's has always been the way I would want to go for their security alone, as I said in another thread I do not plan on blowing a ton of money so I do not need to earn a ton. Depending on the jackpot size, the interest of 4%, or even 3% on a million or two would far exceed my goals.

          $10 million or more would simply be icing on the already sweet cake. More money is not going to change my lifelong attributes derived from hard work, and overall hardship, which lead to a responsible upbringing and wisdom. Although I would study the market because I would have a lot more free time on my hands to do so, I want to keep it as least complicated as possible. A larger jackpot would allow me to accept probably even the smallest yielding CD, and still be very weathly.

           

          Should I want to earn more later down the road, then I could if need be. Perhaps when I open up a few businesses pertaining to my other talents, and skills. but I do not want the lottery to become a burden, or seem like a lot of work for a long time. That would defeat my purpose of winning it, "relaxation and a stress fee lifestyle" for the most part. At least compared to being trapped in a wage-slave job with no free time. Thanks for all the info thus far, and I will check out that site as well. I think my bank said that I would start accumulating, or be paid interest "immediately."

           

          But if you had to wait for an annual check, then you would have to live off the principal, wouldn't that cost you interest? Or could you receive your first payment in the form of an advance? I would think any bank would be more than willing to give you a couple hundred thousand if you were about to invest $10 million? If not, I would have to take out a loan, and pay it off at the end of the year when I receive my first interest check. Otherwise I would have to dip into the principal to live.

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            Columbia City, Indiana
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            Posted: March 16, 2006, 2:21 am - IP Logged

            There are two ways to approach this problem:

            First, you have the option of keeping your job and living off what you earn for the first year while waiting for your investment to grow into that first interest payment. The second method is to keep the millions intact and live off the change for the first year.

            For example, let's say you win a twenty-million- dollar jackpot, and you elect to take the cash option. Assuming a cash value of 55% of the advertised jackpot, this would leave you with a gross win of $11,000,000.00 before taxes. For the sake of argument, let's say you'll pay an even 30% in taxes, so that leaves you with $7,700,000.00. If you can live on a hundred grand for the first year, you can put your remaining $7.6M into CD's, buy mortgage certificates or whatever you're comfortable with. With that kind of money invested at 5%, you'll earn $380,000.00 annually. Of that, you'll give up about $60k to the government, plus another point or two for your state and community. Now, here's the tricky part, the part that gets a lot of people into trouble: If you don't grow your principal, you won't grow your income, either. Every year you can continue to live on $100,000.00 increases your earning power, so the second year, you'll be earning interest on $7.8M, the third year, $8M, the fourth $8.3M, and so on. Remember, this assumes that your investment pays you only 5% interest but, given the amount of money we're talking about here, 6% or even 8% isn't out of the question.

            After pondering this for quite some time, I've decided that $30M would be enough for me. This would give me an after-tax income of just over one million dollars per year. That's plenty to live on, with enough left over to help support my favorite charities, my church and to give the kids a nice Christmas every year. Again, this is what works for me. I'm sure others here wouldn't be satisfied unless their jackpot exceeded Jack Whittaker's, but I prefer not to take part in that contest.

            "He who dies with the most toys ... is still dead, and had to leave his toys behind."

             

            Come, Pinky; we must prepare for tomorrow night...

            Jim

              sirbrad's avatar - Lottery-062.jpg
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              Posted: March 16, 2006, 2:40 am - IP Logged

              Yes I agree. I also figured I would not even need over a million to live fine for a very long time, as I have no kids nor much family at all. That is the way I like it for now, as I wish to enjoy my youth for awhile. As I said in another thread, I by no means need very much in interest to be very well off, and even $30,000 a year would be plenty for me now. Although I would like the security of a few more million, I won't be complaining about winning a million or two.

              I could easily live off of about $10,000 for that first year, then be ready to live it up afterward. Like I said, all depends on the jackpot size as to how much principal I can take out. As many have said before, if you had problems managing money before you won the lottery, you will probably have them afterward, sometimes worse. Luckily I never had such problems as extravagant spending. never had the money to blow.

              I would be more than content with a paid off house alone, and an extra car. I learned long ago to appreciate what you have, not what you don't have. But what I desire most is not all the luxury items that can be had after a jackpot win, but more so the financial security/infinite financial freedom that I would have. Knowing I am set for life, and can do what I actually want to do as opposed to working and making others rich.

              Knowing I always have plenty of money, and time on my hands to do what I enjoy. Being able to live life a lot more purely, and resting better at night. Not wondering where my next dollar will be coming from, or if my job will last. I also believe there is no state tax in PA on lottery winnings.

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                Morrison, IL
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                Posted: March 16, 2006, 12:10 pm - IP Logged

                Yep, money may not buy happiness, but the freedom that is associated with winning a Powerball or Mega Millions jackpot certainly would make me very happy!!

                  sirbrad's avatar - Lottery-062.jpg
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                  Posted: March 23, 2006, 3:40 am - IP Logged

                  How about lucky for life? Say you collect the $36,000 a year ($27,000 after 25% deduction) Would you still have to pay any taxes yearly on the principal alone if it is not earning any interest? I would hope not, the 25% deduction already kills the amount won enough as it is. 

                    danisiri's avatar - Avatar all_for_Jesus.jpg

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                    Posted: March 23, 2006, 5:26 am - IP Logged

                    Currently, the federal tax on long-term capital gains (366 days or more) is capped at 15%.

                    If you set up a trust immediately following your major win, your ten-million-dollar jackpot would pay you $340,000.00 per year net, minus any state and local taxes, which can vary widely.

                    However, by putting part of it into carefully selected municipal bonds, it's possible to reduce your tax burden to almost nothing. In the past, munis weren't considered to be good investments on a large scale, but they're gaining popularity in today's market as viable tax shelters.

                    Real estate is also a very sound financial haven, but stay away from REITs, or Real Estate Investment Trusts, for the time being. If you plan to park any part of your fortune in physical land, be prepared to travel in order to inspect your investment personally. If you can find it, buy undeveloped lakefront property and hold onto it for a few years, or buy urban rental units in major cities. In this case, you want to buy in areas which will support your mortgage. Again, know what your buying, and take the trouble to inspect it personally.

                    Of the two choices listed above, I would recommend the lakefront land. I bought two undeveloped lots just three years ago, and they've already more than doubled in value.

                    Interesting thread here.  I agree that federal tax on long-term capital gains is capped at 15%.  But, for interest income (e.g., from non-muni bonds and CDs), it is taxed at your income tax bracket (currently at 35% for the highest level - which you would be if you generate over $314000 in income).

                    I agree though that muni bonds are the best way to go to avoid federal income tax.  If you can get munis in the state you reside, they are often exempt from state tax and even from local tax as well, so you would get a triple tax break. 

                    One of the caveat of munis though is that some are subject to the AMT, which is an alternative federal tax - that hopefully will go away soon.  Until then, though, when you buy munis, be careful to avoid those subject to the AMT. 

                    Alas, with so much money to invest, definitely an excellent, experienced financial advisor/planner is the best way to go.  That way you can let them handle the headaches of how best to maximize return and reduce risk.  Also, I agree that it is important to budget yourself to live within your means and to leave some interest income to reinvest and increase your principal.  A friend of my friend won $55 million in the CA lottery, took the annuity, and still ran out of money every year.

                    So, personally, if I won, I would take the lump sum and invest half of it in munis and half in precious metals (gold, platinum, etc.) to help leverage against the weakening dollar and inflation (the gold market has seen about a 25% jump in just one year).  Real estate is slowing down right now, so it may not be the best choice in case it undergoes a correction as occurred in the early 1990's - but definitely keep it as a possibility.

                    Of course the best investment of all is investing in God's kingdom.  "Do your givin' will your livin', so your knowin' where its goin'."  There aren't any hearses pulling U-hauls!

                    Happy investing!

                     

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                      md
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                      Posted: March 23, 2006, 8:23 am - IP Logged

                      Very informative and enlightening thread!  LP members are interesting people.

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                        Columbia City, Indiana
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                        Posted: March 23, 2006, 9:28 am - IP Logged

                        danisiri said:

                        "One of the caveats of munis though is that some are subject to the AMT, which is an alternative federal tax - that hopefully will go away soon.  Until then, though, when you buy munis, be careful to avoid those subject to the AMT."

                        ____________________________________________________

                        An excellent point, and one I neglected to mention.

                        The Alternative Minimum Tax, however, isn't limited to tax-free municipal bonds; it can surprise you when you least expect it, depending upon your chosen investment sector. In addition to certain munis (as pointed out by danisiri), stock and commodity options can also trigger this tax, depending on how well you do in those markets, and so can other investments, such as some REITs (depending on how they're structured). I'm not suggesting that danisiri meant to imply otherwise, and the advice quoted above is very sound, in my opinion, and should be heeded.

                        I can't adequately emphasize the importance of taking the time to speak with a qualified expert, such as a licensed financial adviser or CPA, before you win your jackpot. Doing so will arm you with the information you'll need at the critical moment (when you'll need it most). If you wait until after you discover you have the lone winning ticket for a major jackpot, you'll have so much on your mind that you probably won't be able to absorb the finer points of the information he'll give you, which in turn could affect the decisions you make concerning where to park various parts of your fortune. Personally, that's not something I'm willing to leave to the whims of chance.

                        Remember, no matter who you hire to manage your money, it's still your money. Your chosen financial adviser will do just that; he'll give you advice, but it's up to you to make the decisions and direct him in a combined effort to reach or maintain your personal financial goals. The news section on this forum contains many sad stories of people who were blessed with sudden wealth, but then decided they didn't need or want to take an active part in overseeing their own investment portfolios, so it comes down to whether you want to learn all this boring stuff now, or learn it later. 

                        See this thread for more information:

                        http://www.lotterypost.com/thread/131022

                        Come, Pinky; we must prepare for tomorrow night...

                        Jim

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                          Posted: March 23, 2006, 6:28 pm - IP Logged

                          Sooo no further taxes on lucky for life then but the annual 25% a year?