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Payment of Lottery Prizes

Topic closed. 23 replies. Last post 9 years ago by justxploring.

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justxploring's avatar - villiarna
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Posted: December 19, 2007, 4:20 pm - IP Logged

Since 2007 is coming to an end, I was wondering what I would do if I won a jackpot in the next 2 weeks (I can only hope!) because I've read so many different versions of the tax laws.  I'm also not sure if smaller prizes like $50,000 are paid right away or if there is still a waiting period.

Here is a statement from the IRS 

When Paid

A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment. However, if not later than 60 days after the winner becomes entitled to the prize, the winner chooses the option of a lump sum or an annuity payable over at least 10 years, the payment of winnings is considered made when actually paid. If the winner chooses an annuity, file Form W-2G each year to report the annuity paid during that year.

So if you win in Sept or Oct and wait until Jan, there is no advantage, since 60 days will have passed and you'll still need to pay 2007 taxes, as the law clearly states that winnings are paid when credited or set apart for the claimant.  In the meantime, you also won't be earning interest on your money, so that might also be a consideration while a ticket is sitting in your sewing basket or tool box.

In Nov and Dec you can wait until Jan, but no later than 60 days after the actual drawing, because the IRS is saying here that the date of payment is the one considered. 

Since many State web sites say that often a winner must wait for all the paperwork to be processed, winning any substantial amount in Dec and collecting it the same year seems unlikely.  PA advises  

"Typically, it takes approximately 4-6 weeks to process your claim once it has been received at our Headquarters location.  If your claim is received at Lottery Headquarters in mid- to late-December, claims processing may be delayed until the new year to ensure that prize payments and tax forms are issued in the same calendar year."

Maybe people are wondering...why the heck does she care?  No, I didn't win anything.  I was just curious, since I've often read press releases where someone wins a big jackpot in late Dec and claims the prize immediately and thought "Why didn't he just wait a few days?"  I guess it really doesn't matter, except that I'd probably want to spend at least a couple of weeks making plans before running to the lottery office.

    TheGameGrl's avatar - character catafly.jpg
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    Posted: December 19, 2007, 7:37 pm - IP Logged

    May I first say, May blessed winnings be bestowed upon you so you can find out the answer! In the meantime, after much consideration of your question, Going to the claims office upon winning simply bumps up your check receipt date. With that in mind, it doesnt change the fact that the witholdings will still transpire and your local tax will still want their hand out. So pay today, pay tomorrow, its just a matter of time.  With technology in electronic banking its less then 6 weeks for full payouts now. The states just like to use the excuse- We have to do a background check (time: 3 minutes to run the check), We have to file the tax ( time: 4 minutes to imput and remit to FEDS by Electronic file) , We have to wait til all the states involved pool their funds for payout (takes one day for all states to transmitt to the main fund). So in reality it takes one day and 12 minutes to really do a payout. THe hold up is the amount of compounded interest each state can make by simply retaining the funds for as long as they can to milk the financial gain. They already have a large amount in reserve from folks who didnt claim throughout the year! (OKay I'll get off my soap box) .

    My answer may not be purely accurate , but the well wishes for you are! Merry Christmas!

    ~~Is it true, Is it kind,Is it necessary. ~~~

    pa:888,4445,6132,4444,8008

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      Posted: December 19, 2007, 8:03 pm - IP Logged

      When I won 6300 in nj they sent me 4600 after withholdings. Then I had to add 6300 income to my next tax return! But you can deduct whatever you spent to win.

      When The Jack Man won PB he got 113 million lump sum "after taxes".

      In general anything over 600 dollars the machine says "FILE CLAIM" and you have to fill out a form, send to Lottery HQ (or go in person i guess???) and then wait for the check a few weeks later, as they immediately withhold income taxes, because they're afraid you might spend it before the next tax time.

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        Posted: December 19, 2007, 9:02 pm - IP Logged

        "I was just curious, since I've often read press releases where someone wins a big jackpot in late Dec and claims the prize immediately and thought "Why didn't he just wait a few days?""

        Let's say you win $50 million (and it will be really neat if do). The IRS deducts 25% or $12.5 million for taxes but you'll probably owe another 10% when you file your taxes. If the claim is for December 2007, you'll have to pay the $5 million by April 15, 2007, but if the claim is in January of 2008, the $5 million isn't due until April 15, 2008. The difference of two weeks gives you an extra year to draw interest on the $5 million.

        There is always a thread about "what I would do if I hit the jackpot" but actually having a real live winning multimillion dollar ticket in your hand is a different ballgame. People probably claim the prize immediately because they want to get the ball rolling. Why look for a safe place to hide the ticket when it's safer just to sign the back and cash it at the state lottery office?

        There is plenty of time to talk to tax professionals and lawyers while the state is processing your claim. Other than making a few bucks off the interest on unpaid taxes or the desire to remain anonymous, is there another reason to wait?

          justxploring's avatar - villiarna
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          Posted: December 20, 2007, 1:37 am - IP Logged

          Thanks, GameGrl.  There are no state taxes in Florida however, so I only would care about the IRS ruling on this matter. 

          I do agree with you about the time it probably really takes to process a claim.  The other guy wants to hang on to his money as long as possible.  Try sending a claim to an insurance company! 

            four4me's avatar - gate1
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            Posted: December 20, 2007, 1:54 am - IP Logged

            Thanks, GameGrl.  There are no state taxes in Florida however, so I only would care about the IRS ruling on this matter. 

            I do agree with you about the time it probably really takes to process a claim.  The other guy wants to hang on to his money as long as possible.  Try sending a claim to an insurance company! 

            lottery prizes are considered unearned income and should be reported to the irs go to their website.

              justxploring's avatar - villiarna
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              Posted: December 20, 2007, 3:15 am - IP Logged

              lottery prizes are considered unearned income and should be reported to the irs go to their website.

              Of course lottery prizes are taxable income!  That was never part of this discussion.  I don't think you read my original post, since I highlighted an entire paragraph from the IRS.   This was about advantages or disadvantages of claiming in Dec or Jan.  See the yellow highlighted portion above.

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                Posted: December 20, 2007, 11:39 am - IP Logged

                Since 2007 is coming to an end, I was wondering what I would do if I won a jackpot in the next 2 weeks (I can only hope!) because I've read so many different versions of the tax laws.  I'm also not sure if smaller prizes like $50,000 are paid right away or if there is still a waiting period.

                Here is a statement from the IRS 

                When Paid

                A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment. However, if not later than 60 days after the winner becomes entitled to the prize, the winner chooses the option of a lump sum or an annuity payable over at least 10 years, the payment of winnings is considered made when actually paid. If the winner chooses an annuity, file Form W-2G each year to report the annuity paid during that year.

                So if you win in Sept or Oct and wait until Jan, there is no advantage, since 60 days will have passed and you'll still need to pay 2007 taxes, as the law clearly states that winnings are paid when credited or set apart for the claimant.  In the meantime, you also won't be earning interest on your money, so that might also be a consideration while a ticket is sitting in your sewing basket or tool box.

                In Nov and Dec you can wait until Jan, but no later than 60 days after the actual drawing, because the IRS is saying here that the date of payment is the one considered. 

                Since many State web sites say that often a winner must wait for all the paperwork to be processed, winning any substantial amount in Dec and collecting it the same year seems unlikely.  PA advises  

                "Typically, it takes approximately 4-6 weeks to process your claim once it has been received at our Headquarters location.  If your claim is received at Lottery Headquarters in mid- to late-December, claims processing may be delayed until the new year to ensure that prize payments and tax forms are issued in the same calendar year."

                Maybe people are wondering...why the heck does she care?  No, I didn't win anything.  I was just curious, since I've often read press releases where someone wins a big jackpot in late Dec and claims the prize immediately and thought "Why didn't he just wait a few days?"  I guess it really doesn't matter, except that I'd probably want to spend at least a couple of weeks making plans before running to the lottery office.

                justxploring....I have a different take on the situation you outlined above, winning in Sept or Oct and waiting until January.  First what I would do is break down the IRS statement as follows:

                When Paid

                A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment.

                What this says to me is that the money is mine when there is no restriction on the condition of payment.  Well, claiming the ticket should be considered the point in time when there is no furthur condition for payment from my end.  Up until that point in time there is a big condition for the payment, submitting the claim for the winning ticket. The way I see it, if you wanted to wait, for whatever reason (heck it's your money and you are free to do as you choose) you are considered paid when the lottery validates your ticket.

                 A few other things;

                The second part of the IRS statement refers to after the winner becomes entitled to the prize.  Based on the above the winner is entitled to the prize upon claiming the prize, not the drawing/winning date.

                I am not either a lawyer or tax person.  Consult professionals for advice.  The above is only my opinion based upon reading the information you posted.

                My biggest concerns would be deciding between cash or annuity (I know everyone has thoughts on this issue), lining up advisors (tax, legal, estate, financial) and since in my state (CA) one can not remain anonymous but does not have to attend a press conference, what will my plan be to hide from the prying press and those people looking for a handout.

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                  Posted: December 20, 2007, 11:48 am - IP Logged

                  May I first say, May blessed winnings be bestowed upon you so you can find out the answer! In the meantime, after much consideration of your question, Going to the claims office upon winning simply bumps up your check receipt date. With that in mind, it doesnt change the fact that the witholdings will still transpire and your local tax will still want their hand out. So pay today, pay tomorrow, its just a matter of time.  With technology in electronic banking its less then 6 weeks for full payouts now. The states just like to use the excuse- We have to do a background check (time: 3 minutes to run the check), We have to file the tax ( time: 4 minutes to imput and remit to FEDS by Electronic file) , We have to wait til all the states involved pool their funds for payout (takes one day for all states to transmitt to the main fund). So in reality it takes one day and 12 minutes to really do a payout. THe hold up is the amount of compounded interest each state can make by simply retaining the funds for as long as they can to milk the financial gain. They already have a large amount in reserve from folks who didnt claim throughout the year! (OKay I'll get off my soap box) .

                  My answer may not be purely accurate , but the well wishes for you are! Merry Christmas!

                  TheGameGirl....you are forgetting one other major point in calculating how long a state lottery should take in completing a payout.  They have to collect the money from the lottery retailers.  While this doesn't take the 6 weeks the lottery sets aside, it in all fairness takes longer then one day and 12 minutes.  And yes they have reserves, but probably not enough to cover a large multi-million dollar jackpot.

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                    Posted: December 20, 2007, 11:59 am - IP Logged

                    If the claim is for December 2007, you'll have to pay the $5 million by April 15, 2007, but if the claim is in January of 2008, the $5 million isn't due until April 15, 2008. The difference of two weeks gives you an extra year to draw interest on the $5 million.

                     

                    Don't you mean for December 2007 by April 15, 2008 and for January 2008 by April 15, 2009?

                     

                    Question for any tax pros out there, on the January 2008/April 15, 2009 scenario; would the IRS require an estimated payment during  2008 on the 10% owed when your 2008 taxes are due (April 15, 2009), $5 million or so in this case?

                      justxploring's avatar - villiarna
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                      Posted: December 20, 2007, 1:26 pm - IP Logged

                      If the claim is for December 2007, you'll have to pay the $5 million by April 15, 2007, but if the claim is in January of 2008, the $5 million isn't due until April 15, 2008. The difference of two weeks gives you an extra year to draw interest on the $5 million.

                       

                      Don't you mean for December 2007 by April 15, 2008 and for January 2008 by April 15, 2009?

                       

                      Question for any tax pros out there, on the January 2008/April 15, 2009 scenario; would the IRS require an estimated payment during  2008 on the 10% owed when your 2008 taxes are due (April 15, 2009), $5 million or so in this case?

                       "Don't you mean for December 2007 by April 15, 2008 and for January 2008 by April 15, 2009"

                      Yes, Lucky.  Of course.   Smiley   Just an oversight.  It's like all the people in a couple of weeks who will be mailing mortgage, car payments and rent checks with January 2, 2007.   I meant to write if you claim the money in 2007 you'll have to pay the $5 million by April 2008 for the year 2007.

                      I've worked on commission where I didn't get paid for several months, so I know you get taxed in the year you get your money, not when you earned it.  However, after I posted & highlighted the above statement from the IRS website, it's clear that someone who wins in Sept or Oct will still be taxed for the current year, even if the prize is claimed in Feb or Mar. I'm sure the IRS realized that some people might want to wait & postpone taxes as long as possible when they made this rule. I also don't think there's any question about claiming a prize late in Dec now. Even if it only takes 2 or 3 weeks to process a claim, you'd still get paid in 2008.  Just my person thoughts on this - to avoid any possibility of confusion, it would be better to wait until Jan 2 to go to the lottery office and file. People do make mistakes, and although it would be rectified after an audit, it's possible someone might report your claim to the IRS for 2007 and you get paid in Jan 2008 and then inadvertently taxed for both years (see quote above from the PA lottery) so why rush to file a claim?  Yes, this is a waste of energy and time, but almost every post on LP about "what will you do when you win...?" is too.

                      would the IRS require an estimated payment

                      Good point!  I think you are right, although I am not a tax pro, but it makes sense. The IRS doesn't like people owing a lot of money. As an independent contractor, I should have thought of this sooner. I spent my whole life working for a company as an employee, so I never realized independent contractors and the self-employed have to file quarterly until a few years ago because, as the IRS puts it, Federal Taxes are Pay as You Go. 

                        justxploring's avatar - villiarna
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                        Posted: December 20, 2007, 1:34 pm - IP Logged

                        I have a different take on the situation you outlined above, winning in Sept or Oct and waiting until January. 

                        I think we both agree, unless I'm not reading you right.  There can't be 2 different interpretations from what I'm reading.

                        The IRS says that you must be taxed on the year you win unless it's less than 60 days from the end of that year.  So you can hang onto your ticket as long as you want (depending on the state and the amount of days you have before expiration) but you will still have to pay taxes for the current year unless you win after Nov 1.   The statement is very clear to me.  The money is always "credited" or "put aside" for the winner the date of the drawing.  So the IRS is stating that if you win on Aug 15, 2007, whether or not the lottery actually hands you a check does not matter.  That money has been "put aside" for you as the jackpot winner. 

                          four4me's avatar - gate1
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                          Posted: December 20, 2007, 1:37 pm - IP Logged

                          Of course lottery prizes are taxable income!  That was never part of this discussion.  I don't think you read my original post, since I highlighted an entire paragraph from the IRS.   This was about advantages or disadvantages of claiming in Dec or Jan.  See the yellow highlighted portion above.

                          excuse my ignorance in my last post i did read all what you wrote but misinterpreted it.


                          On the other hand lets say someone won 20 grand today playing pick 4 they could cash 2 tickets today and two tickets next year before the time is up allowing them to put 10 grand on this years taxes and 10 grand on next years taxes. This might benefit someone who files taxes and is at or below an income threshold and doesn't want to be in a higher tax bracket by claiming the whole 20 grand on this years income.

                            justxploring's avatar - villiarna
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                            Posted: December 20, 2007, 1:46 pm - IP Logged

                            excuse my ignorance in my last post i did read all what you wrote but misinterpreted it.


                            On the other hand lets say someone won 20 grand today playing pick 4 they could cash 2 tickets today and two tickets next year before the time is up allowing them to put 10 grand on this years taxes and 10 grand on next years taxes. This might benefit someone who files taxes and is at or below an income threshold and doesn't want to be in a higher tax bracket by claiming the whole 20 grand on this years income.

                            Four4me, I would never call you ignorant.  We all rush through boards. 

                            Yes, I totally agree with you about the pick 4.  In fact, when I started this thread, I was thinking of a smaller prize amount too. Notice I only mentioned $50,000 because I've been playing Fantasy5 and, as silly as it sounds, thought "what if I win $50,000 this week?" (That's what happens in the middle of the night when I can't sleep.) I'm in a lower bracket this year so I'd love to get the money now, but from everything I've read, some lottery offices won't pay you right away.  I guess it depends on the state.  There is always a disclaimer that funds might not be available immediately when claimed. There is probably a cut-off point, like $10,000 where they make the winner wait until a background check is run.  Maybe it's $100,000.  I don't know.  The PA site (above quoted) said that to avoid a mix-up often end of year claims are paid in Jan so both the claim form and payment are reported in the same year. It doesn't mention the amount of the claim.

                            After Stack brought up $50 million the discussion changed, then estimated taxes were brought up, etc., but the original post was only about a small win like $50,000 in Fantasy 5.   So you are right on point. 

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                              Posted: December 20, 2007, 2:44 pm - IP Logged

                              I have a different take on the situation you outlined above, winning in Sept or Oct and waiting until January. 

                              I think we both agree, unless I'm not reading you right.  There can't be 2 different interpretations from what I'm reading.

                              The IRS says that you must be taxed on the year you win unless it's less than 60 days from the end of that year.  So you can hang onto your ticket as long as you want (depending on the state and the amount of days you have before expiration) but you will still have to pay taxes for the current year unless you win after Nov 1.   The statement is very clear to me.  The money is always "credited" or "put aside" for the winner the date of the drawing.  So the IRS is stating that if you win on Aug 15, 2007, whether or not the lottery actually hands you a check does not matter.  That money has been "put aside" for you as the jackpot winner. 

                              justxploring....here is what I read on the IRS statement you posted, which is below.

                              When Paid

                              A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment. However, if not later than 60 days after the winner becomes entitled to the prize, the winner chooses the option of a lump sum or an annuity payable over at least 10 years, the payment of winnings is considered made when actually paid. If the winner chooses an annuity, file Form W-2G each year to report the annuity paid during that year.

                              1)  What needs to be defined is the date when paid for a person that wins a lottery game;  is it  the date of the drawing, the date the winner files a claim or the date the winner recieves the check.   To me it makes sense to be the date of the check form the lottery is cut.  That is when the winner has no restrictions as to how they want to handle their money.  Up until then then the winner does not have any ability to spend that money, they do not have possesion of the money until the check is cut and in their hands. 

                              2)  The  60 day portion of this statement to me only refers to the lump sum/annuity decision.  The part of the statement about the winner becoming entitled to the prize goes to what was discussed above.  From there the 60 day rule comes into effect regarding if you choose annuity or lump sum.  I think what this is saying is that if you choose annuity you will have to pay taxes each year, not up front like you would for a lump sum payment.

                              No matter what my interpertation is, when I win (hopefully) I will get a tax professional to answer this question.