Oklahoma United States
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February 24, 2006
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Let's say you won a large Powerball jackpot and decided to take anuity payments over the next 30 years.
It makes sense that you would be liable for taxes on your anuity payments and any capital gains generated there on from that payment, but what about the taxes owed on the capital gains being incremented on the remainder that Powerball has control of?
Who's liable for paying taxes on the remainder of your anuity that is not in your possession?
Wandering Aimlessly United States
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November 5, 2005
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An annuity is a tax deferred product sold by insurance companies. The interest accumulates tax deferred. You only pay income tax when you withdraw the money.
There are different types of annuities and the lottery is a usually a structured, immediate annuity. That is, you get the same payment for a certain amount of years. PB is now a graduated immediate annuity. You can do that with your own savings, that is, invest so interest isn't taxed while the money is building. If you buy an annuity instead of a CD, the money grows tax deferred. Tax is due only as payments are made to you. However, there are very high surrender charges, penalties, etc. for early withdrawal.
kent, washington United States
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Quote: Originally posted by justxploring on Aug 25, 2007
An annuity is a tax deferred product sold by insurance companies. The interest accumulates tax deferred. You only pay income tax when you withdraw the money.
There are different types of annuities and the lottery is a usually a structured, immediate annuity. That is, you get the same payment for a certain amount of years. PB is now a graduated immediate annuity. You can do that with your own savings, that is, invest so interest isn't taxed while the money is building. If you buy an annuity instead of a CD, the money grows tax deferred. Tax is due only as payments are made to you. However, there are very high surrender charges, penalties, etc. for early withdrawal.
Oklahoma United States
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February 24, 2006
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Quote: Originally posted by justxploring on Aug 25, 2007
An annuity is a tax deferred product sold by insurance companies. The interest accumulates tax deferred. You only pay income tax when you withdraw the money.
There are different types of annuities and the lottery is a usually a structured, immediate annuity. That is, you get the same payment for a certain amount of years. PB is now a graduated immediate annuity. You can do that with your own savings, that is, invest so interest isn't taxed while the money is building. If you buy an annuity instead of a CD, the money grows tax deferred. Tax is due only as payments are made to you. However, there are very high surrender charges, penalties, etc. for early withdrawal.
Thank you justxploring,
That makes sense.
Also found this in the FAQ @ Powerball's site...
IS THE CASH AMOUNT THE JACKPOT AMOUNT AFTER TAXES?
No. When we advertise a prize of $100 million paid over 29 years (30 payments), we actually have less than $50 million in cash. When someone wins the jackpot and wants cash, we give them all of the cash in the jackpot prize pool. If the winner wants the annuity, we invest the $50 million in cash to fund the annuity payments. The winner gets the cash plus the interest earned. When you see an estimated jackpot annuity prize, we are estimating both sales and what the market's prices on certain securities will be. The annuity jackpot amount and the cash jackpot amount that we announce are always estimates until sales are final and, for the annuity jackpot, until we take bids on the purchase of securities.
Federal and State Income tax apply to whatever income you actually receive in a given tax year, whether it is wages or lottery prizes. If you take the cash amount (say $50 million), then you pay income tax on $50 million). If you take the annuity (say $100 million), then you pay income tax on the money you actually receive each year. Just like your wages, a withholding amount is required to be taken out immediately. The lottery will send you a W2-G form and you figure your actual tax at tax time.
United States
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September 17, 2003
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Quote: Originally posted by justxploring on Aug 25, 2007
An annuity is a tax deferred product sold by insurance companies. The interest accumulates tax deferred. You only pay income tax when you withdraw the money.
There are different types of annuities and the lottery is a usually a structured, immediate annuity. That is, you get the same payment for a certain amount of years. PB is now a graduated immediate annuity. You can do that with your own savings, that is, invest so interest isn't taxed while the money is building. If you buy an annuity instead of a CD, the money grows tax deferred. Tax is due only as payments are made to you. However, there are very high surrender charges, penalties, etc. for early withdrawal.
That's not true if the owner of the annuity dies. The estate is taxed on the cash value of the annuity at once. Yet another reason why people who talk it over with professionals choose cash.
Wandering Aimlessly United States
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Quote: Originally posted by dvdiva on Aug 25, 2007
That's not true if the owner of the annuity dies. The estate is taxed on the cash value of the annuity at once. Yet another reason why people who talk it over with professionals choose cash.
We weren't talking about an inheritance, dvdiva. The question was on who pays the taxes while an annuity is growing in value.
Wandering Aimlessly United States
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I want to add something here. One of the reasons I rarely consider estate tax when discussing annuities is that the majority of people I know in the real world never pay this tax. The entire estate tax issue is being debated, so nobody really knows what will happen after 2010. However, most annuities are paid as a lump sum benefit when a person dies.
I hope I can post this link. Apparently, dying after winning the lottery is not as uncommon as one would think. It looks as if many families have fought the IRS ruling you mentioned. To be honest, since I've never met a winner of a large jackpot, I haven't give this much thought, but you are correct, dvdiva. So if someone is concerned about what will happen when he/she dies, then maybe taking annual payments is not a good choice. However, IMHO it's completely unconstitutional for the IRS to expect people to pay estate tax on money that won't be received for several years. It doesn't make any sense. That's why it's been challenged. They are taxing the heirs on the market value as if they inherited property. Anyway, I came across this link on some of the court cases: