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Where do you guys come up with the 35% Federal Tax rate

Topic closed. 20 replies. Last post 10 years ago by Rick G.

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March 6, 2007
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Posted: March 6, 2007, 6:21 pm - IP Logged

I am under the impression that if somone won a large amount of money, the tax rate would be 25% - 28% for federal taxes.  I am basing this info from the info from the irs website. 

Why does people on the board reference the rate at 35%?  I am aware that they take 25% off the top but where does the additional 10% come from? 

 This is my first post so I hope I didn't break any rules.

From the IRS site 

2. Sweepstakes, Wagering Pools, and Lotteries

File Form W-2G for each person to whom you pay $600 or more in gambling winnings from a sweepstakes, wagering pool, or lottery (including a state-conducted lottery) if the winnings are at least 300 times the amount of the wager. The wager must be subtracted from the total winnings to determine whether withholding is required and, at the option of the payer, to determine whether reporting is required. The wager must be subtracted at the time of the first payment.

The requirements in this section apply to church raffles, charity drawings, etc. In the case of one wager for multiple raffle tickets, such as five for $1, the wager is considered as $.20 for each ticket.

Withholding

You must withhold federal income tax, at the rate of 25% (regular gambling withholding), from the amount of winnings less the amount wagered if the winnings less the wager exceed $5,000. If the winner of reportable gambling winnings does not provide a TIN, you must backup withhold at the rate of 28% on any such winnings that are not subject to 25% regular gambling withholding. That is, backup withholding applies if the winnings are at least $600 but not more than $5,000 and are at least 300 times the wager. Figure the 28% backup withholding on the amount of the winnings reduced, at the option of the payer, by the amount wagered.

Installment payments of $5,000 or less are subject to 25% regular gambling withholding if the total proceeds from the wager will exceed $5,000.

If payments are to be made for the life of a person (or for the lives of more than one person), and it is actuarially determined that the total proceeds from the wager are expected to exceed $5,000, such payments are subject to 25% regular gambling withholding. When a third party makes the payments, for example, an insurance company handling the winnings as an annuity, that third party must withhold.

    Todd's avatar - Cylon 2.gif
    Chief Bottle Washer
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    Posted: March 6, 2007, 6:33 pm - IP Logged

    Chuckiec25,

    YOU are correct.  Anyone going around saying that the gov't withholds 35% is WRONG.

    The exact figure is 25% for federal tax withholding.

    But some people will go around complaining about how the top tax bracket is 35% (or whatever it is).  Well, who cares?  Do these people not understand that there are ways of dealing with your money that will result in varying tax bills?  Do any of these people think Donald Trump pays 35% on every cent he earns?

     

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      Posted: March 6, 2007, 6:37 pm - IP Logged

      here in ky for state plus fed. tax total wa6%---25%

        justxploring's avatar - villiarna
        Wandering Aimlessly
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        Posted: March 6, 2007, 6:44 pm - IP Logged

        People have tax write-offs, so of course the amount paid varies by a number of factors.  In Florida (since there is no state income tax) the tax withheld is automatically 25% if you are resident. If a non-resident alien, they hold 30%.  (Specifics are on the site.)  However, IMHO I think it's always best when someone wins millions to put aside enough to cover the maximum. I realize that only a portion would be taxed at that amount, but there have been many cases where winners (not just the lottery, but in contests) haven't expected to pay extra tax and got a surprise. A good tax attorney should be able to offer the best advice on these matters.  In brief, I think the 35% level has only been mentioned to warn people to be cautious and prepared after winning a huge amount of money.


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          Posted: March 6, 2007, 6:47 pm - IP Logged

          Chuckiec25,

          YOU are correct.  Anyone going around saying that the gov't withholds 35% is WRONG.

          The exact figure is 25% for federal tax withholding.

          But some people will go around complaining about how the top tax bracket is 35% (or whatever it is).  Well, who cares?  Do these people not understand that there are ways of dealing with your money that will result in varying tax bills?  Do any of these people think Donald Trump pays 35% on every cent he earns?

          Also don't forget your state will want their cut for all they did to bring about your good fortune!! LOL And most likely your city, you win = they win in their mind!! Bash These vary so much depending where you live. I think OH is about 3.5% but Calif is over 11% I have heard! Some cities are 2% but here again it varies. So 25% + 11% + 2% could = as much as 38%!! 

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            Posted: March 6, 2007, 6:47 pm - IP Logged

            Thanks for the response.  Wanted to make sure I wasn't missing something.

            Good luck to everyone tonight!!

             

            My prediction: there will be 3 winning tickets and I won't be one of them.

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              Racine,Wisconsin.
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              Posted: March 6, 2007, 6:51 pm - IP Logged

              Yes, but isn't there federal, state tax, as well as income tax on the winnings?

              Someone correct me if I'm wrong but the way I figure it if you won $10 million,

              you'll only see about $3.5 million after taxes at most.

              From there if you invest that at 5%+  that would be a bit more than $175,000

              before taxes.  Seems like there's no way to avoid the irs every which way 

              you turn. 

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                White Lake,Mi
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                Posted: March 6, 2007, 7:03 pm - IP Logged

                shoot...the gov't taxes you butt when you check out to the great beyond...but if you were to hit the mega millions tonight there is at one thing....you could AFFORD to pay your taxes...LOL!!!!!!!!!!!

                VAL

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                  Chief Bottle Washer
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                  Posted: March 6, 2007, 7:11 pm - IP Logged

                  Also don't forget your state will want their cut for all they did to bring about your good fortune!! LOL And most likely your city, you win = they win in their mind!! Bash These vary so much depending where you live. I think OH is about 3.5% but Calif is over 11% I have heard! Some cities are 2% but here again it varies. So 25% + 11% + 2% could = as much as 38%!! 

                  Not my state.  NJ has no tax on lottery prizes.  There are others like mine.  Check out Jackpot Analysis at USA Mega (www.usamega.com).

                  Also, as I mentioned above, I was only talking about Federal taxes.  I know everyone wants to put 2 cents in about this state tax or that, but the question in this thread was only about federal tax.  And of course I was talking about US residents.  Yes, there are exceptions, and I think anyone would realize that.

                   

                  Check the State Lottery Report Card
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                    Todd's avatar - Cylon 2.gif
                    Chief Bottle Washer
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                    Posted: March 6, 2007, 7:13 pm - IP Logged

                    Yes, but isn't there federal, state tax, as well as income tax on the winnings?

                    Someone correct me if I'm wrong but the way I figure it if you won $10 million,

                    you'll only see about $3.5 million after taxes at most.

                    From there if you invest that at 5%+  that would be a bit more than $175,000

                    before taxes.  Seems like there's no way to avoid the irs every which way 

                    you turn. 

                    You are correct, there is no way to avoid the IRS.  But there are ways to greatly reduce your tax, and the people who work hardest at understanding how things work and are willing to invest time, they will end up paying less.

                     

                    Check the State Lottery Report Card
                    What grade did your lottery earn?

                     

                    Sign the Petition for True Lottery Drawings
                    Help eliminate computerized drawings!

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                      California
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                      Posted: March 6, 2007, 8:09 pm - IP Logged

                      Yes, but isn't there federal, state tax, as well as income tax on the winnings?

                      Someone correct me if I'm wrong but the way I figure it if you won $10 million,

                      you'll only see about $3.5 million after taxes at most.

                      From there if you invest that at 5%+  that would be a bit more than $175,000

                      before taxes.  Seems like there's no way to avoid the irs every which way 

                      you turn. 

                      Jose400..here is the federal tax situation in a nutshell for a state that does not tax winnings: 

                      You win $10 million.  The state lottery witholds 25% and sends it to the IRS.  At this point you get a check for $7.5 Million.  Come tax filing time your income (say the lottery winnings were your only souce of imcome) will be $10 million.  You, for discussion sakes, are in the top income bracket of 35% or $3.5 million.  (I say for discussion sakes because there are many ways you can lessen this amount.)  Your maximium tax liability to the government is the $3.5 million.  You already paid or had withheld (just like your emoloyer does on a pay check) $2.5 million.  You owe an additional $1.0 mllion.  You net out $6.5 million.

                      You are right you can't avoid the IRS, particualry a high profile person like a lottery winner.

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                        Posted: March 6, 2007, 8:38 pm - IP Logged

                        Chuckiec25,

                        YOU are correct.  Anyone going around saying that the gov't withholds 35% is WRONG.

                        The exact figure is 25% for federal tax withholding.

                        But some people will go around complaining about how the top tax bracket is 35% (or whatever it is).  Well, who cares?  Do these people not understand that there are ways of dealing with your money that will result in varying tax bills?  Do any of these people think Donald Trump pays 35% on every cent he earns?

                        Since a lottery win is considered "earned income" on your 1040, you also have to pay FICA and Medicare. I think Medicare has a income ceiling beyond which you don't have to pay, but you still have FICA. So I think when people say 30 or 35%, they are lumping in the "other" taxes with it. Not everything that comes out of the check is strictly Federal tax.

                        I've never won a big jackpot here, but according to the way it was explained to me by a call to the lottery office, they do take out 30% for the Fed.  That comes off the top. If you end up owing less, you get it back when you file the 1040.  This is their way of making sure they don't lose out by ending up with a lottery winner where the person spends everything and goes bankrupt, basically, when tax time comes, and the govt gets shorted.  And there is also state tax. Here the max amt is 7.5%, so they take out that also. Again, if you end up not owing the max (say you win $1,000 on a ticket, not a multi-million dollar jp) and end up with Gross Income that qualifies for less than the max income tax rate, you get the difference back when you file your tax form at the end of the year.

                        But depending upon your state income tax, what with Fed income tax, FICA, Medicare and state income tax, it can easily go beyond 35% that is deducted from the winnings.

                        This is why I've never understood why here locally, you sometimes see where someone plays the same combo in P3 five times on one ticket and wins straight for (5*500) $2500.....which he/she has to take to the lottery office and pay taxes on. Whereas, if they understood, they could have bought 5 separate tickets, cash them in one at a time at the retailer, and get all of the money. Because any win under $600 here (i.e. up to $599) is just cashed in by the retailer, no paperwork needed.

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                          California
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                          Posted: March 6, 2007, 8:59 pm - IP Logged

                          Since a lottery win is considered "earned income" on your 1040, you also have to pay FICA and Medicare. I think Medicare has a income ceiling beyond which you don't have to pay, but you still have FICA. So I think when people say 30 or 35%, they are lumping in the "other" taxes with it. Not everything that comes out of the check is strictly Federal tax.

                          I've never won a big jackpot here, but according to the way it was explained to me by a call to the lottery office, they do take out 30% for the Fed.  That comes off the top. If you end up owing less, you get it back when you file the 1040.  This is their way of making sure they don't lose out by ending up with a lottery winner where the person spends everything and goes bankrupt, basically, when tax time comes, and the govt gets shorted.  And there is also state tax. Here the max amt is 7.5%, so they take out that also. Again, if you end up not owing the max (say you win $1,000 on a ticket, not a multi-million dollar jp) and end up with Gross Income that qualifies for less than the max income tax rate, you get the difference back when you file your tax form at the end of the year.

                          But depending upon your state income tax, what with Fed income tax, FICA, Medicare and state income tax, it can easily go beyond 35% that is deducted from the winnings.

                          This is why I've never understood why here locally, you sometimes see where someone plays the same combo in P3 five times on one ticket and wins straight for (5*500) $2500.....which he/she has to take to the lottery office and pay taxes on. Whereas, if they understood, they could have bought 5 separate tickets, cash them in one at a time at the retailer, and get all of the money. Because any win under $600 here (i.e. up to $599) is just cashed in by the retailer, no paperwork needed.

                          Badger not sure when you called the lottery (as there was a change in withholding amount a few years back) but here is the information from the Wisconsin Lottery Web Site:

                           Do I have to pay taxes on my winnings? All lottery winnings are taxable. The Lottery automatically deducts 25 percent federal for any winnings $5,001 or over, and 6.75 percent state income tax for any winnings over $1,999.

                          Not sure about the FICA/Medicare issue.  Doesn't sound right, maybe otherswill give us their understanding of this issue.  People use the 35% because that is the maximum current Federal income tax rate. 

                          I like your idea on the P3 ticket, however I just play the big jackpot games!! 

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                            Posted: March 6, 2007, 9:29 pm - IP Logged

                            fica and medicare are not additional pay ins from the lottery winnings. Not sure where that myth came into play, but NO, there is not additional fica/medicare needed to be paid in . unless your employer goofed! If your relative gifts you 10k, you arent responsible for more fica/medicare...same holds true for this particular .

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                              Charlotte
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                              Posted: March 6, 2007, 10:38 pm - IP Logged

                              Since a lottery win is considered "earned income" on your 1040, you also have to pay FICA and Medicare. I think Medicare has a income ceiling beyond which you don't have to pay, but you still have FICA. So I think when people say 30 or 35%, they are lumping in the "other" taxes with it. Not everything that comes out of the check is strictly Federal tax.

                              I've never won a big jackpot here, but according to the way it was explained to me by a call to the lottery office, they do take out 30% for the Fed.  That comes off the top. If you end up owing less, you get it back when you file the 1040.  This is their way of making sure they don't lose out by ending up with a lottery winner where the person spends everything and goes bankrupt, basically, when tax time comes, and the govt gets shorted.  And there is also state tax. Here the max amt is 7.5%, so they take out that also. Again, if you end up not owing the max (say you win $1,000 on a ticket, not a multi-million dollar jp) and end up with Gross Income that qualifies for less than the max income tax rate, you get the difference back when you file your tax form at the end of the year.

                              But depending upon your state income tax, what with Fed income tax, FICA, Medicare and state income tax, it can easily go beyond 35% that is deducted from the winnings.

                              This is why I've never understood why here locally, you sometimes see where someone plays the same combo in P3 five times on one ticket and wins straight for (5*500) $2500.....which he/she has to take to the lottery office and pay taxes on. Whereas, if they understood, they could have bought 5 separate tickets, cash them in one at a time at the retailer, and get all of the money. Because any win under $600 here (i.e. up to $599) is just cashed in by the retailer, no paperwork needed.

                              Ladies, Gentlemen:

                              Lottery winnings are considered gambling winnings.  They are not earnings, in the sense that you would be paying FICA, Medicare, etc.  They are not subject to these taxes, nor self employment taxes.  They are simply income that is not "earned" (you didn't work or put time in on the job) to obtain them. 

                              I would agree that with previous synopsis concerning the withholding of 25% at the initial winning handover, with an additional 10% being due later in the year.  At this income level ($10MM), I can gurantee that unless alternate legal entities come into play (trusts, etc), that you will be paying no less than 35% and that you will not have any real deductions (income too high to qualify) to decrease your tax liability.

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