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Lottery Taxes

Topic closed. 78 replies. Last post 8 years ago by paulkbarnes.

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sirbrad's avatar - Lottery-062.jpg
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Posted: July 18, 2008, 5:22 am - IP Logged

I asked this question long ago but still never got a definite answer. Say you win $1,000,000 and the 25% is already paid, (PA) would you still be taxed on this income year after year? I don't see how you could, as it would not be income anymore after the first year and taxes already taken out. I keep hearing some say taxed at 35% or something like that, what does this mean exactly?

The will take 35% of your money each year? I don't think so, if that was the case you would have nothing pretty quickly. Say you cleect interest at 5% with a CD, how much would tax be on that? I heard 10% but I guess it depends on the bank. Also I heard Municipal Bonds pay like 20%, are they risky? I also read they were tax exempt. I would most likely go half and half on CD's and Munis.

I know this not the place to ask for tax advice, but just wanted to see if anyone had any idea how it all works. I emailed the IRS, but you have to call and I am not going to go through all of that with them until I win. So if anyone can explain more thoroughly it would be appreciated, and informative for other members seeking the same answers in the future.

    Todd's avatar - Cylon 2.gif
    Chief Bottle Washer
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    Posted: July 18, 2008, 8:11 am - IP Logged

    Just think of it like income tax on money you earned from work.

    When they withhold the 25%, that's like your employer withholding money from your paycheck.  The amount they withhold is an estimate of what you will owe in taxes, based not only on your income, but also what tax breaks you will get by paying mortgage interest, medical expenses, retirement contributions, etc.

    The lottery withholds the 25% in exactly that same way.  I really hate when people say, "Your taxes are REALLY 35%."  No, they're not 35% for everyone.  It depends on what you do with the money.

    If you get your big check from the lottery, and just stick it in the bank and buy a lot of stuff, then yeah, you may be at 35%.  But if you invest your money wisely, gve to charities, and do other smart things with your money, then no, it won't be 35%.

    So come April 15th, you will have to file taxes and perhaps pay more money in taxes, but you're not paying some new taxes.  You're just paying what you really owe after you explain to the IRS what you did with your money, just like you do if you owe money today because your employer withheld too little from your paycheck.

     

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      Houston
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      Posted: July 18, 2008, 1:26 pm - IP Logged

      Excellent question. After reading your question and reading Todd's responds, it seems like the jackpot you win, will continue to get taxed after you already paid whatever  the tax rate to claim the money.

      I sort of doubt it's like "income tax on money you earned from work." People go to work, get a check and pay tax on their earnings, per check. If you're a jackpot winner, that ONE win should be like a ONE-time of working. Therefore, they should tax it just that ONE time and no more. If I win it again then they tax it again as if I worked a "second" week.

      I have a question though... and I read about a lottery winner that did just that. He took his winnings and invested wisely through a team of financial advisors etc. His portfolio was set up where he live off the interests of his earning (the actually winning money just stays in the bank and continue to flip profits/interests for him). So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense. That would mean his "living off interests" would get smaller and smaller so again, I doubt they continue to tax your jackpot winnings after taxing it at the actual rate the first time.

        BaristaExpress's avatar - BaristaExpressMX zpsfb0d8b5d.png
        Magnolia, Delaware
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        Posted: July 18, 2008, 1:52 pm - IP Logged

        So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense. That would mean his "living off interests" would get smaller and smaller so again, I doubt they continue to tax your jackpot winnings after taxing it at the actual rate the first time.

        Your right it makes no sense, that's because they are taxing the earnings your getting from the amount in the bank! That's call "Capital Gains" and that's whats being taxed and that's at a rate of 15% that's added to what your already going to pay when you file your income taxes on April 15th. Interest is taxable but at a rate of 15% and not the rate at which the rest of your taxable income is going to be charged at..... example>>> (10K of earned interest is going be charged 15% tax by the tax man!) <<< example 

        Keep dreaming the impossible dream, it just may come true! Thumbs Up

          Todd's avatar - Cylon 2.gif
          Chief Bottle Washer
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          Posted: July 18, 2008, 3:18 pm - IP Logged

          Excellent question. After reading your question and reading Todd's responds, it seems like the jackpot you win, will continue to get taxed after you already paid whatever  the tax rate to claim the money.

          I sort of doubt it's like "income tax on money you earned from work." People go to work, get a check and pay tax on their earnings, per check. If you're a jackpot winner, that ONE win should be like a ONE-time of working. Therefore, they should tax it just that ONE time and no more. If I win it again then they tax it again as if I worked a "second" week.

          I have a question though... and I read about a lottery winner that did just that. He took his winnings and invested wisely through a team of financial advisors etc. His portfolio was set up where he live off the interests of his earning (the actually winning money just stays in the bank and continue to flip profits/interests for him). So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense. That would mean his "living off interests" would get smaller and smaller so again, I doubt they continue to tax your jackpot winnings after taxing it at the actual rate the first time.

          Your description is not really accurate.

          With your income from your job, the amount of taxes withheld is calculated based on what the company estimates you will be paid for the entire year.  They then divide that amount by the number of paychecks in the year, and that's what they take out.

          Then, in April, you calculate your taxes against what you actually earned (as opposed to the company's estimate a year before), plus whatever expenses you are able to deduct.  If you did not pay enough in taxes during the year, you pay the difference.  If you paid too much, the IRS gives you a refund.

          That is precisely how lottery winners are taxed.  However, rather than estimating how much taxes each individual winner will have to pay on their various-sized prizes, they do a flat 25% withholding for everyone.

          Then, the person does their taxes in April and if the 25% withholding was not enough, they will pay the difference, just like they would for a paycheck.

          There may be others who can add a little more detail around what I've described, but I'm relating facts here.  This is the way it works.

          If you want to think of it as getting taxed twice, then go ahead and think of it that way, but that's not what actually happens.

           

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

           

          Sign the Petition for True Lottery Drawings
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            sirbrad's avatar - Lottery-062.jpg
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            Posted: July 18, 2008, 7:08 pm - IP Logged

            Just think of it like income tax on money you earned from work.

            When they withhold the 25%, that's like your employer withholding money from your paycheck.  The amount they withhold is an estimate of what you will owe in taxes, based not only on your income, but also what tax breaks you will get by paying mortgage interest, medical expenses, retirement contributions, etc.

            The lottery withholds the 25% in exactly that same way.  I really hate when people say, "Your taxes are REALLY 35%."  No, they're not 35% for everyone.  It depends on what you do with the money.

            If you get your big check from the lottery, and just stick it in the bank and buy a lot of stuff, then yeah, you may be at 35%.  But if you invest your money wisely, gve to charities, and do other smart things with your money, then no, it won't be 35%.

            So come April 15th, you will have to file taxes and perhaps pay more money in taxes, but you're not paying some new taxes.  You're just paying what you really owe after you explain to the IRS what you did with your money, just like you do if you owe money today because your employer withheld too little from your paycheck.

            But you do not get back the 25% like you do from your employer right? Also how can they continue to tax you if you do not earn money in interest, and just want to save a million dollars in cash? If they continued to tax you on that you would eventually have nothing! Taxing interest would make sense, but not the principle that earns no interest year after year. In that case how would anyone be able to stay rich if they just wanted to save the money and not receive interest? Also ar CD's taxed?

            It sounds as though you are saying that the IRS will bully you into spending the money or they will take it?

              sirbrad's avatar - Lottery-062.jpg
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              Posted: July 18, 2008, 7:13 pm - IP Logged

              Excellent question. After reading your question and reading Todd's responds, it seems like the jackpot you win, will continue to get taxed after you already paid whatever  the tax rate to claim the money.

              I sort of doubt it's like "income tax on money you earned from work." People go to work, get a check and pay tax on their earnings, per check. If you're a jackpot winner, that ONE win should be like a ONE-time of working. Therefore, they should tax it just that ONE time and no more. If I win it again then they tax it again as if I worked a "second" week.

              I have a question though... and I read about a lottery winner that did just that. He took his winnings and invested wisely through a team of financial advisors etc. His portfolio was set up where he live off the interests of his earning (the actually winning money just stays in the bank and continue to flip profits/interests for him). So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense. That would mean his "living off interests" would get smaller and smaller so again, I doubt they continue to tax your jackpot winnings after taxing it at the actual rate the first time.

              Yeah that is what I was saying. Taxing interest depending on the investment makes sense, but not continuing to tax the principle, otherwise everyone would be broke in a few years. I would personally spread my money out in various investments, and low risk munis and mid-term CD's, which would be way more than enough for me to live great depending on the jackpot. I would shoot for tax exempt munis at the highest rate, and with the least risk.

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                NY
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                Posted: July 18, 2008, 8:12 pm - IP Logged

                It's really simple. It's called income tax because it's a tax on income. You don't pay income tax on stuff that isn't income. How much income tax you pay depends on your total taxable income, and the source of the income, but has nothing to do with what bank the income comes from. Barista express is wrong. Interest income is regular income and is taxed at the same rate as other earned income. Capital gains are exactly what the name says: gains on capital, which is an increase in the value of an asset, such as real estate or stock. Unless you sell the asset  the increased value doesn't result in income, so the gain is only taxable when it is realized as a result of selling the asset. That income only qualifies for the reduced capital gains tax rate if the asset has been held for more than year.

                  sirbrad's avatar - Lottery-062.jpg
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                  Posted: July 18, 2008, 8:30 pm - IP Logged

                  So I will ask again, what if I have a million dollars just sitting in a non-interest bearing account or my own safe for years? Can I be taxed on it again and again?

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                    Kentucky
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                    Posted: July 18, 2008, 8:44 pm - IP Logged

                    Excellent question. After reading your question and reading Todd's responds, it seems like the jackpot you win, will continue to get taxed after you already paid whatever  the tax rate to claim the money.

                    I sort of doubt it's like "income tax on money you earned from work." People go to work, get a check and pay tax on their earnings, per check. If you're a jackpot winner, that ONE win should be like a ONE-time of working. Therefore, they should tax it just that ONE time and no more. If I win it again then they tax it again as if I worked a "second" week.

                    I have a question though... and I read about a lottery winner that did just that. He took his winnings and invested wisely through a team of financial advisors etc. His portfolio was set up where he live off the interests of his earning (the actually winning money just stays in the bank and continue to flip profits/interests for him). So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense. That would mean his "living off interests" would get smaller and smaller so again, I doubt they continue to tax your jackpot winnings after taxing it at the actual rate the first time.

                    Lotteries withhold 25% from the winnings just like an employer withholds a percentage of your wages in each pay period. Sometime in January, the employer gives the employees a W-2 form that states how much the wages were and how much was withheld for taxes. If somebody won $1 million they would get a W-2G form from the lottery stating they won that amount and $250,000 was withheld for taxes. The winner would fill out a form 1040 the same as they did the year before with the exception of line 21; "Other income (type and amount)". They would enter "gambling" for the type and $1 million for the amount and continue to fill out the form the same way they did the year before.

                    They get the same standard or itemized deductions, that amount is subtracted from the adjusted gross income, and they fill out a mini-worksheet to find out how much the tax is. If that amount is less than what was withheld, they get a refund and if that amount is more, they owe. As Todd said, the taxes are not exactly 35% (I added a $1 million to my 2007 return and it came out to 32%), but the winner should know they will owe at least another $75,000 in taxes.

                    "I sort of doubt it's like "income tax on money you earned from work.

                    On the 2007 form 1040 there are 17 lines for income, 8 lines on form 1040A, and the first line on both is for "Wages, salaries, tips, etc. from form W-2 we get from our employers. Believe it or not, there are other forms of income that is taxed exactly the same as your wages.

                    "People go to work, get a check and pay tax on their earnings, per check."

                    The amount the wages on that check are predetermined by the number of exemptions the employee has. A guy with a wife and 6 kids will have less in taxes withheld than a single person with no other exemptions. Some employers withhold a percentage in taxes for one weekly wage that is equal to the amount that weekly wage would make for an entire year. For instance that weeks wage could be much higher from working overtime and/or the weekend.

                    Look at it this way, winning $1 million in one year is the same adding all your weekly paychecks together for one year. If your wages are $41,600, you are taxed on the amount whether it was exactly $800 each week or 52 different amounts.

                    "So, if the IRS was to continue to tax his money, they would be taxing his "actual winnings that's sitting in the bank "untouched" -- that doesn't make sense."

                    The lotteries could withhold 35% and the winner would probably get a refund but since they don't, the winner should know they will owe more in taxes. They could put the entire check of $750,000 into an interest baring account. If they got 5% and the money was in the account for 6 months, the interest would be about $18,750. They would get a 1099-INT form from the bank, that amount would be put on line 8a as taxable interest income, and would be added to the gross adjusted income for the tax year. At a 32% tax rate, they would owe another $6000 in taxes on the interest too.

                    If the prize was won in 2007, it and whatever other income the winner had would be taxed for that year only. After paying whatever tax is owed, they would have at least $650,000 in tax free money. Whatever income they make from the $650,000 in 2008 will be taxed for that tax year. If they average a return of 7.5% from interests, dividends, stock sales, or any other type of investment on the $650,000, they would have an income of $48,750 for that year and would be taxed on that amount.

                    "I read about a lottery winner that did just that. He took his winnings and invested wisely through a team of financial advisors etc. His portfolio was set up where he live off the interests of his earning"

                    I've always wondered how that worked. Does this "team" spend weeks debating the "best" investment or do they just have one person find which of the company's funds best suits the investor based on the amount to be invested and the type of return?

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                      Kentucky
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                      Posted: July 18, 2008, 8:51 pm - IP Logged

                      So I will ask again, what if I have a million dollars just sitting in a non-interest bearing account or my own safe for years? Can I be taxed on it again and again?

                      If you already paid all the taxes on the $1 million, the answer is no. If you invest the same $1 million, you will be taxed on whatever income you get from the investments. A 5% yearly interest rate will make you $50,000 and you will owe taxes on the $50,000.

                        fja's avatar - gnome1

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                        Posted: July 18, 2008, 8:52 pm - IP Logged

                        So I will ask again, what if I have a million dollars just sitting in a non-interest bearing account or my own safe for years? Can I be taxed on it again and again?

                        If you win, and pay the initial tax on the winnings and then turn it into cash in a safe, no you will not be taxed on it the following year(after the year you have won)....if you do not work for the entire year and still have 1 million dollars sitting in your safe, your earned income will be zero....No taxes paid to any government agency and no tax refund back to you....(the Government is betting that you can't do that and still have 1 million in your safe). 

                        "Everybody has to believe in something...I believe I'll have another beer!"   = W.C.Fields                      

                          Todd's avatar - Cylon 2.gif
                          Chief Bottle Washer
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                          Posted: July 18, 2008, 8:54 pm - IP Logged

                          So I will ask again, what if I have a million dollars just sitting in a non-interest bearing account or my own safe for years? Can I be taxed on it again and again?

                          It's not really too complex.

                          The first year you get taxed on the jackpot that you "earned".

                          In following years you would get taxed on any interest you earned on the prize, but obviously the prize money itself is not re-taxed. 

                          Again, all this stuff is exactly like any income earned in a paycheck, nothing special, and not rocket science.

                          BTW, that 25% withholding is not a magic number that cannot be breached.  If you give a lot to charity in the first year or do something else that would be a tax shelter, you could possibly lower your total taxes to less than 25% and get some of it back as a refund.

                          Or, you could do nothing to shelter your jackpot (like just sticking it in a regular bank account) and you will pay another 10% or so in taxes.

                          As a side note, there seems to be generally a lot of mis-infomation about taxes.  You don't "get back money" like a rebate if you get a refund when you fill out your taxes.  You get refund because your employer withheld too much of your money.  It means you did not specify a realistic number of deductions when you filled out the initial tax form when you were hired.  It's YOUR money, and the IRS has been holding on to it.

                          If you're getting a huge refund every year, that means you should contact your employer and ask them to adjust your withholding amount.  You would be much better off to get the money in your check, rather than having the IRS hold it.  You could be earning interest on that money.

                           

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

                           

                          Sign the Petition for True Lottery Drawings
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                            Kentucky
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                            Posted: July 18, 2008, 8:56 pm - IP Logged

                            It's really simple. It's called income tax because it's a tax on income. You don't pay income tax on stuff that isn't income. How much income tax you pay depends on your total taxable income, and the source of the income, but has nothing to do with what bank the income comes from. Barista express is wrong. Interest income is regular income and is taxed at the same rate as other earned income. Capital gains are exactly what the name says: gains on capital, which is an increase in the value of an asset, such as real estate or stock. Unless you sell the asset  the increased value doesn't result in income, so the gain is only taxable when it is realized as a result of selling the asset. That income only qualifies for the reduced capital gains tax rate if the asset has been held for more than year.

                            I hope the IRS isn't moderating this thread because it looks like some people have never filled out a tax form.

                              fja's avatar - gnome1

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                              Posted: July 18, 2008, 9:00 pm - IP Logged

                              I Agree! With Todd

                              I always try to work up to break even when I do my taxes....no big refund coming back,,,no big payment in April...gives me more cash to work with month to month....

                              "Everybody has to believe in something...I believe I'll have another beer!"   = W.C.Fields