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State Tax

Topic closed. 28 replies. Last post 10 years ago by four4me.

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Posted: September 13, 2006, 7:40 pm - IP Logged

Here's a hypothetical question. What if you were on a business trip to a state that doesn't tax lottery winnings and purchased a lottery ticket. This ticket happened to win the jackpot. You then decided to move to that State on January 1st and establish residency there. Would you be able to avoid paying the State tax in the State you moved from?

    Preppy's avatar - scene sunoverlake.jpg
    Los Angeles County, CA
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    Posted: October 1, 2006, 2:49 pm - IP Logged

    It is best to hire an excellent lawyer and an excellent CPA.

    1. Does your home state (State A) tax out of state gambling winnings or out of state lottery winnings?

    2. Are you taking the lump sum or annuity?

    3. What was the win date of the lottery?

    4. How close is it to your move date?

    5. When is the prize paid out?

    6. When did you receive it?

    Once you answered the questions above, you would most likely get a couple of very different answers.

    Assuming your home state (State A) has a state tax on lottery winnings, I would say, you would not be able to avoid paying state tax in your home state ("the state you moved from") even though the lottery ticket was purchased in a different state that did not place a state tax on lottery winnings. In particular you would most likely have to pay taxes on the lump sum or on the first payment of your annuity. You may be able to reduce the amount taxes owed.

    In general, most states have strict language that states that out of state lottery winnings of residents are subject to tax no matter where these winnings are received. Furthermore, most states classify lottery winnings from another state as gambling winnings from another state and therefore taxable.  However, if there is a tax reciprocity agreement between the states in question, a resident may claim an out of state tax credit on tax returns for the tax paid to the other state.

    If you were living in your home state (State A) from X date to December 31 and bought a lottery ticket on some date between X and December 31 in a different state (State B) and you relocate to that state (State B) from January 1 of the next year until your next move date you would most likely still have to pay taxes to State A.  You were a resident of State A when you bought a lottery ticket in another state that won and that you received the proceeds. You would have winnings from gambling in another state.  

      justxploring's avatar - villiarna
      Wandering Aimlessly
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      Posted: October 1, 2006, 3:55 pm - IP Logged

      Preppy, I think the first suggestion, which is ask a good CPA or tax attorney, is the best answer.  This is a good question. I always thought income was based on where it was earned, not where you live, but I've had a similar question.  I live in FL and there is no state tax.  I always wondered if I won money here and moved to a state where there is a 7% state tax if I'd have to pay that tax.  If that is true, that's one more reason to take a lump sum. Also, if I win money next week in FL and then move to NC, I shouldn't have to pay NC tax for 2006 since I lived here when I bought it.  Again, I would always contact a good accountant. I haven't won money, but I did have trouble with earnings as expressed below.

      In my opinion (and I don't know each state law) state income tax should not be charged twice, so you either pay it one state or the other. Why else would anyone want to purchase a lottery ticket or gamble in a casino in another state? That said, look at the example below.

      Here's an example from experience: My office/home was in MA which had a 5% state tax. One of the salespeople lived in NH which had no state tax.  Did he have to pay MA tax? The answer is Yes, but he had to keep a log of how many hours he spent in MA.  So he would claim he was only in the office for a certain percentage of his time and pay taxes accordingly. I didn't think that was fair, but it was legal.  Then he convinced the company to move the office to NH!  Okay, so I wanted to know if that meant I didn't have to pay MA income tax any more because all my money was being earned in NH. I was told I still needed to pay MA tax anyway. I eventually moved to NH, but I had a "battle" with MA because it didn't make sense to me. How can they have it both ways?  Hope I'm making sense, but I doubt if I helped to answer your question.

        four4me's avatar - gate1
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        Posted: October 1, 2006, 5:21 pm - IP Logged

        Here's a hypothetical question. What if you were on a business trip to a state that doesn't tax lottery winnings and purchased a lottery ticket. This ticket happened to win the jackpot. You then decided to move to that State on January 1st and establish residency there. Would you be able to avoid paying the State tax in the State you moved from?

        not if you claimed the winnings before you moved. I could be wrong. But this guestion has been hashed around before on lottery post.

        it might also depend on whether you cashed the ticket in the state you won deposited the money there and didn't deposit any cash in you bank where you live. if you want to avoid paying taxes in you home state you might consider moving before you cash the ticket. Also some states don't consider you a resident until you have lived their a period of time like 30/60/90 days.

        i would speak with a tax attorney before i did anything like that.

          st.germain's avatar - Tarlor
          chicago ill.
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          Posted: October 1, 2006, 6:45 pm - IP Logged

          First off, your going to pay the gambling tax in the state that you won the ticket....then secondly, upon returning to your home state and in the following spring ..you can expect to have to declare whatever is left of those winnings in the form of "disbursement of monies" as "INCOME" to the IRS and the state you live in (state taxes versus federal taxes). The state of ILLINOIS sees those disbursements as "INCOME"  and therefore "INCOME TAX" and then proceed to tax you to death until you choke with "EMOTION". Man, your butt will be hurting so bad...you wonder if buying that ticket was worth it.

          My take on that is ...Heck Yeah!  It was worth it. Have fun! Can't win if you don't buy a ticket.

           

                                                                                        Argue

            st.germain's avatar - Tarlor
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            Posted: October 1, 2006, 6:48 pm - IP Logged

            Oh! If that state doesn't have the "Gambling Tax" ...Then Illinois will find away to do the Gambling tax upon you. In Illinois...it is all about the money. And they want it...yours..theirs or anyones. Welcome to Illinois  .    Smile when bending over.

                                                                      Smile

              Preppy's avatar - scene sunoverlake.jpg
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              Posted: October 1, 2006, 7:57 pm - IP Logged

              Preppy, I think the first suggestion, which is ask a good CPA or tax attorney, is the best answer.  This is a good question. I always thought income was based on where it was earned, not where you live, but I've had a similar question.  I live in FL and there is no state tax.  I always wondered if I won money here and moved to a state where there is a 7% state tax if I'd have to pay that tax.  If that is true, that's one more reason to take a lump sum. Also, if I win money next week in FL and then move to NC, I shouldn't have to pay NC tax for 2006 since I lived here when I bought it.  Again, I would always contact a good accountant. I haven't won money, but I did have trouble with earnings as expressed below.

              In my opinion (and I don't know each state law) state income tax should not be charged twice, so you either pay it one state or the other. Why else would anyone want to purchase a lottery ticket or gamble in a casino in another state? That said, look at the example below.

              Here's an example from experience: My office/home was in MA which had a 5% state tax. One of the salespeople lived in NH which had no state tax.  Did he have to pay MA tax? The answer is Yes, but he had to keep a log of how many hours he spent in MA.  So he would claim he was only in the office for a certain percentage of his time and pay taxes accordingly. I didn't think that was fair, but it was legal.  Then he convinced the company to move the office to NH!  Okay, so I wanted to know if that meant I didn't have to pay MA income tax any more because all my money was being earned in NH. I was told I still needed to pay MA tax anyway. I eventually moved to NH, but I had a "battle" with MA because it didn't make sense to me. How can they have it both ways?  Hope I'm making sense, but I doubt if I helped to answer your question.

              "I always thought income was based on where it was earned, not where you live, but I've had a similar question."

              Every state is the US has different tax policies. I live in California. California neither taxes residents nor taxes non-residents if they win a lottery that is played within the state of California. California does tax California residents on external lottery winnings (gambling winnings from another state). Furthermore, California does not tax winnings from Indian Casinos in California, but does tax winnings from our neighbor Las Vegas, Nevada (gambling winnings from another state).

              I lived and worked in Manhattan (NYC) for a couple of years, and my office collogues who lived in neighboring states (Connecticut, New Jersey, and Pennsylvania) but worked in Manhattan had to pay NY takes as well as their own state taxes. I believe NJ was a bit different.

              "I live in FL and there is no state tax.  I always wondered if I won money here and moved to a state where there is a 7% state tax if I'd have to pay that tax.  If that is true, that's one more reason to take a lump sum. "

              I am a total lump sum fan. I believe it really is the only really good option.

              "Also, if I win money next week in FL and then move to NC, I shouldn't have to pay NC tax for 2006 since I lived here when I bought it.  Again, I would always contact a good accountant."

              Lump sum is truly the best. Lump sum would most likely eliminate 95% of the problem of taxes if you decide to move or move more than once after winning the lottery. Why would you want to move from FL to NC after winning a lottery?

              "In my opinion (and I don't know each state law) state income tax should not be charged twice, so you either pay it one state or the other. Why else would anyone want to purchase a lottery ticket or gamble in a casino in another state?"

              Most people don't care or are to busy to research the implications of winning a lottery or gambling winnings, especially the tax implications. However, the sad reality there is a high chance of getting double taxed if you buy a lottery ticket in the wrong state or a state that does not have a tax reciprocity agreement with your own state. Unfortunately, I missed the debate about the Euro-millions not being taxed a couple a months back. I certainly would have put my two cents in about that topic. I am shocked that in this day and age US citizens actually believe that they can win a jackpot in a major lottery and not be taxed on it.

              Justxploring, your example from experience makes sense to me. I also had similar experiences of being relocated by a company. Anytime you have income from multiple states or countries the tax situation will be messy. The states/countries involved will send you letters and notices threatening you with late penalty payments and requests for audits trying to get every nickel and dime out of you they can. Based on my own personal experiences, I would not be surprised if relocating before or after winning the lottery would be very similar to when a company relocates an employee to a new state or country.

                Preppy's avatar - scene sunoverlake.jpg
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                Posted: October 1, 2006, 8:02 pm - IP Logged

                not if you claimed the winnings before you moved. I could be wrong. But this guestion has been hashed around before on lottery post.

                it might also depend on whether you cashed the ticket in the state you won deposited the money there and didn't deposit any cash in you bank where you live. if you want to avoid paying taxes in you home state you might consider moving before you cash the ticket. Also some states don't consider you a resident until you have lived their a period of time like 30/60/90 days.

                i would speak with a tax attorney before i did anything like that.

                I would like someone on this forum to engage in this futile exercise and notify us of the outcome.

                I just don't believe it will be that easy. I don't think it will happen. Surely, somebody would have tried it by now.

                I agree with st.germain.

                  four4me's avatar - gate1
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                  Posted: October 1, 2006, 8:27 pm - IP Logged

                  Taxation in this country is very complicate especially where large amounts of money are concerned. What might sound good in theory might be mist-rued when dealing with the bureaucracy. one thing is for sure if they figure they can get a piece of it they will.

                  trying to change location before cashing the ticket might work but might not. sine they might go back to the day it was purchased.

                  You could go to each lotteries website and read the tax rules concerning winning.

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                    Posted: October 2, 2006, 11:09 am - IP Logged


                    The finer points of the tax laws get pretty complicated and the rules are different for each state, but here are some basic rules of thumb that will most likely apply:

                    * Income tax is based on income, and unless a specific form of income is exempted, you will owe taxes on it. A number of states exempt winnings from their own lotteries, but no state exempts winnings from out-of- statelotteries or gambling.

                    * The state in which you are a resident doesn't care where the income came from. If it's income it will be subject to your state's usual income taxes. Taxes paid to one state might reduce your taxes in another state.

                    * States have a right to tax income earned within their borders regardless of the residence of the person who earned the income. Some cities also tax income earned in the city regardless of residence.

                    * Income generally becomes taxable at the moment that you become entitled to it. This means that moving to another state is not likely to save you from paying taxes in the state you were resident in when you won.

                    * If you move out of state during the year you will be a resident of two states during that tax year, and you will be subject to each state's rules about part-time residents.  Again, taxes paid to one state may affect your tax obligations to another state.

                    * Anyone who earns a large sum of money and then unnecessarily moves to another state during that tax year without finding out what the tax implications are isn't the sharpest tool in the shed.

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                      Posted: October 2, 2006, 12:33 pm - IP Logged


                      The finer points of the tax laws get pretty complicated and the rules are different for each state, but here are some basic rules of thumb that will most likely apply:

                      * Income tax is based on income, and unless a specific form of income is exempted, you will owe taxes on it. A number of states exempt winnings from their own lotteries, but no state exempts winnings from out-of- statelotteries or gambling.

                      * The state in which you are a resident doesn't care where the income came from. If it's income it will be subject to your state's usual income taxes. Taxes paid to one state might reduce your taxes in another state.

                      * States have a right to tax income earned within their borders regardless of the residence of the person who earned the income. Some cities also tax income earned in the city regardless of residence.

                      * Income generally becomes taxable at the moment that you become entitled to it. This means that moving to another state is not likely to save you from paying taxes in the state you were resident in when you won.

                      * If you move out of state during the year you will be a resident of two states during that tax year, and you will be subject to each state's rules about part-time residents.  Again, taxes paid to one state may affect your tax obligations to another state.

                      * Anyone who earns a large sum of money and then unnecessarily moves to another state during that tax year without finding out what the tax implications are isn't the sharpest tool in the shed.

                      KY Floyd...your posting does a great job of outling the major points of state tax laws and lottery winnings.  Best advice is to understand the tax implications before you make any moves.

                      How do you think this would play out.  A resident of Massachusetts buys a MEGA Millions ticket while visiting California and wins the Jackpot.  The person moves to California.  According to California you are a resident when you are in California for other tenative or transitory purpose.  After you move you get your drivers license, get an apartment, etc. and fufill the requirement to be a California resident.  At this point you go to the lottery to claim your prize.  (You also stay in California for years to come and don't move back after getting your money.)  Do you think Massachusetts would be able to collect any income tax?  The person became entilted to the money once it was verfied by the lottery and while a resident of California. If so, there is a fair amount of state income tax savings as California doesn't tax lottery winning and Massachusetts does.  Thoughts?

                      No this did not happen to me.  Just trying to be the sharpest tool in the shed!

                        Preppy's avatar - scene sunoverlake.jpg
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                        Posted: October 2, 2006, 11:53 pm - IP Logged

                        KY Floyd...your posting does a great job of outling the major points of state tax laws and lottery winnings.  Best advice is to understand the tax implications before you make any moves.

                        How do you think this would play out.  A resident of Massachusetts buys a MEGA Millions ticket while visiting California and wins the Jackpot.  The person moves to California.  According to California you are a resident when you are in California for other tenative or transitory purpose.  After you move you get your drivers license, get an apartment, etc. and fufill the requirement to be a California resident.  At this point you go to the lottery to claim your prize.  (You also stay in California for years to come and don't move back after getting your money.)  Do you think Massachusetts would be able to collect any income tax?  The person became entilted to the money once it was verfied by the lottery and while a resident of California. If so, there is a fair amount of state income tax savings as California doesn't tax lottery winning and Massachusetts does.  Thoughts?

                        No this did not happen to me.  Just trying to be the sharpest tool in the shed!

                        Yes, you would have to pay Massachusetts state income tax on the winnings. Massachusetts is rather stern when it comes to taxes. As you said you bought a MEGA Millions ticket in California when you were a resident of Massachusetts. California does not tax non-residents if they win a lottery that is played within the state of California. So you would not have a state tax obligation from California. You won MEGA millions when you were resident of Massachusetts. "Each person that earns a wage in the state of Massachusetts, regardless of where they live, or if residing in Massachusetts and earning a wage in another state, must pay state income taxes in addition to federal income taxes."  "Winnings from the Massachusetts State Lottery and non-Massachusetts lotteries are included in federal gross income and therefore must be included in Massachusetts gross income." "Out of State Lottery Winnings are included with Gambling Winnings and are reported on Schedule X, Other gambling winnings." You would have to pay Massachusetts' top state tax rate on lottery winnings of 5.3%. Massachusetts does not have a Tax Reciprocity Agreements with California. You would not be able to claim credit, get deductions, or minimize your Massachusetts state income tax.

                        In a separate matter, if you stopped in Arizona instead of California and bought a Powerball ticket before returning to Massachusetts and you won the Powerball lottery. You would have the exact same condition as California expect Arizona taxes non-residents if they win a lottery that is played within the state of Arizona. You would have to pay Arizona's top state tax rate on lottery winnings of 5.0%. You would also have to pay Massachusetts' top state tax rate on lottery winnings of 5.3%. Massachusetts does not have a Tax Reciprocity Agreements with Arizona. You would be double taxed. You would not be able to claim credit, get deductions, or minimize your Massachusetts state income tax.

                          Coin Toss's avatar - shape barbed.jpg
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                          Posted: October 3, 2006, 12:26 am - IP Logged


                          Let's make it a wee bit more interesting.

                          Let's say an American hits the Canadian lottery. Now what? 

                          As far as I know, the U.S. is the only country that taxes gambling winnings.  

                            justxploring's avatar - villiarna
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                            Posted: October 3, 2006, 12:32 am - IP Logged

                            I agree that MA would expect payment of the taxes.  As I wrote above, I had a hard time with the Commonwealth of Mass when I moved to NH and requested a hearing.  It wasn't granted, so I never got my "day in court" and I gave in and paid the tax before the penalty & interest grew. Frown

                             

                            "Lump sum is truly the best. Lump sum would most likely eliminate 95% of the problem of taxes if you decide to move or move more than once after winning the lottery. Why would you want to move from FL to NC after winning a lottery?"

                            That's an easy question to answer. I have 2 main reasons. (1) Maybe I would stay & simply look for a less crowded area, but Florida has grown too fast and I'm sick of the traffic jams and all the accidents. A night doesn't go by without hearing about a fatal accident in Fort Myers. It's also hot and humid 8 or 9 months out of the year.  It's October 3 and I have the air conditioning running at 12:25AM and I'm still sweating. (2)  Everyone is always thinking about a huge jackpot when we have these discussions on the board. Of course that would be nice, but let's say I won a small jackpot (meaning under a million) I wouldn't have enough to buy a nice home here and still have money left. A nice home in Naples or Bonita Springs is still around $500K. Even a small villa in a nice community runs over $400K. Sure, if I won $50M, then it wouldn't matter. However, for around $200,000 I can buy a beautiful home in a suburb of Columbia or Raleigh. So then even if I net "only" $500 or $600K it would make a big difference in my life. 

                            EDIT:  Just saw comment by Coin Toss after posting.  I believe a U.S. Citizen plays taxes on all foreign lottery prizes. It's been posted here before and I looked up the law. I guess the best place to go is the IRS web site.  Still, I'm betting if someone wins a lot of money he'll be able to hire a very good tax attorney who knows how to maneuver the system and use loopholes wisely.

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                              Posted: October 3, 2006, 12:51 am - IP Logged

                              KY Floyd...your posting does a great job of outling the major points of state tax laws and lottery winnings.  Best advice is to understand the tax implications before you make any moves.

                              How do you think this would play out.  A resident of Massachusetts buys a MEGA Millions ticket while visiting California and wins the Jackpot.  The person moves to California.  According to California you are a resident when you are in California for other tenative or transitory purpose.  After you move you get your drivers license, get an apartment, etc. and fufill the requirement to be a California resident.  At this point you go to the lottery to claim your prize.  (You also stay in California for years to come and don't move back after getting your money.)  Do you think Massachusetts would be able to collect any income tax?  The person became entilted to the money once it was verfied by the lottery and while a resident of California. If so, there is a fair amount of state income tax savings as California doesn't tax lottery winning and Massachusetts does.  Thoughts?

                              No this did not happen to me.  Just trying to be the sharpest tool in the shed!


                              Thanks. As far as I know, Preppy has it exactly right. I don't know exactly what the law says in Massachusetts, but the income of a Massachusetts resident will be subject to Massachusetts income tax according to the law.  Nothing you do after moving out of Massachusetts can change the past, and before moving you would have been a resident. If you're really curious you might be able to scare up the specific rules with a google search, but the states generally have laws that spell out your tax obligations when you move during the year, and the income earned before moving  is income earned as a resident.  If you buy a lottery ticket and it happens to win, that money  counts as income when the winning numbers were drawn because that's when you become the winner, and therefore entitled to the money. The only exception I would hope for would be if the drawing was after 12/15 and the state won't pay out for two weeks. That should let you defer the taxes until the following year, but you'd still owe Massachusetts income tax.

                              As far as Coin Toss'  question about winning the Canadian lotery, you could think of Canada as another state with whatever tax laws are in place. As a US citizen, regardless of your residence, you'll owe US income tax. Assuming you're a resident of a state with an income tax, you'll owe state income tax.  You could presumably claim the prize and never come back to the US, but then you'd pretty much need to stick to places that don't have extradition treaties with the US.