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Lottery Taxes

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

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Kentucky
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Posted: July 19, 2008, 6:54 am - IP Logged

Thanks that is what I initially suspected as it makes sense. So they would just tax the interest as I also thought. What percentage would they tax it at? So would I owe more taxes the next year on the original million after the 25% witheld? I would not mind the interest taxes as you would still make a lot of money. But all this tax crap just puts a damper on winning the lottery. Everytime someone's wins the IRS does too, which is crap.

The amount of taxable interest is added to you wages etc. and becomes part of your adjusted gross income. If you had no wages for the year, you would only be taxed on the interest. The percentage of taxes you'll pay depends on your filing status, number of exemptions and deductions.

"So would I owe more taxes the next year on the original million after the 25% witheld?"

Let's say you won $1 million a couple of weeks ago and got a check for $750,000 today (July 19, 2008). The lottery will withhold $250,000 and give that money to the IRS. You'll either get a form W-2G stating they withheld that amount along with check or the lottery will send it in January 2009. It's the same as if you earned $1 million for the entire year and that would put you into the highest tax bracket which is around 35%.

Depending on your exemptions, filing status, and deductions, you'll probably owe between 5% and 10% more in taxes. You'll have to write the IRS a check for an amount between $50,000 and $100,000, but you have until April 15, 2009 send them the check. That will give you over 8 months worth of interest by investing all or part of $750,000. That's probably the simplest way to explain it; they withhold $250,000 and you could owe IRS up to another $100,000 on April 15 the following year.

Talk to a good tax person and might owe nothing and even get a refund.

    fja's avatar - gnome1

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    Posted: July 19, 2008, 9:49 am - IP Logged

    I would suggest that if you have a tax CD (turbo tax for instance) that you start a simulated file and plug in 1 million dollars in winnings and see where it lands you,,,,then you can put the initial 25%tax and see how much more you owe ,,,then fill out a state form and if needed a city form....

    Then play with it to see what different scenarios look like

    Even if you talk to a good tax person, if you do not understand, it will still sound like foriegn language,,Then you have to trust that the person you talked to knows what he;s doing....

    "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 19, 2008, 9:56 am - IP Logged

      Todd,

      Your first 4 paragraphs is exactly as I was saying in my first thread. I don't want to confuse Sirbad but if he's reading this, you're only taxed ONCE by the lottery. What you earn on interests after investing your winnings, is SEPARATED from "another lottery taxation." There is no more taxation from the Lottery after they take out the initial taxes to claim your prize.

      You can hold all that money in your house and will never be taxed on it again. If you invest it, you're right (Sirbad), you will NOT be taxed on the PRINCIPLE but you will be taxed on the interests depending on your investment and the "maturity" periods.

      Now, if you get a team of Financial Advisors ( and the lottery officials will strongly recommend that you do as well as your lawyer that may accompany you to claim your prize) -- these people specialize in crafting your investment to fit the lifestyle you want. How they do it? I don't know (and this to answer STACK47).... those team of financial experts will get you a diversify portfolio with a mixture of high, low risk in stock, bonds, munis, CD's, T-Bills ( that main investment by Mega Million Lottery), Coupon Slips (so its' called), and other lucrative investment to get you living of the interests of your earnings.

      I'm not even sure how much if cost to get a team of people like that to look out for you but with a jackpot prize, you wouldn't even worry about the cost. I notice most millionaires have people like that managing their money. You can get your entire team from one financial institution like A.I.G. or investment firms like that.

      The story I read on the guy that did this --- he sort of handpicked his team of advisor and was able to live off $400,000.00 (interest money) a year. I forgot how much he actually won but I remember the interest he lives off and that's a nice little payout for a yearly income.

      The lottery does not tax you.  The IRS does.  Maybe that's where the confusion lies.

      Just like your company doesn't tax you.  The IRS does.  It all goes to the same place.

       

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

       

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

        Todd's avatar - Cylon 2.gif
        Chief Bottle Washer
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        Posted: July 19, 2008, 10:24 am - IP Logged

        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?

        S-

        That was a really great descriptive post, nicely done!  I'm going to mark it as one of my favorites to refer back to in the future.

        I would just like to add one caveat to the initial part about owing an additional $75K.  If the person employs the use of tax shelters they can possibly avoid paying additional taxes, and it is not out of the realm of possibility to get a partial refund on that withheld 25%.

         

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

         

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

          Raven62's avatar - binary
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          Posted: July 19, 2008, 11:07 am - IP Logged

          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?

          After reviewing your Tax situation: If you find yourself in a Tax Bracket greater than 25%: You should consider filing an Estimated Tax Form inorder to avoid the possibility of a Tax Penalty for Under Payment of Taxes.

          A mind once stretched by a new idea never returns to its original dimensions!

            sirbrad's avatar - Lottery-062.jpg
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            Posted: July 19, 2008, 11:44 pm - IP Logged

            The amount of taxable interest is added to you wages etc. and becomes part of your adjusted gross income. If you had no wages for the year, you would only be taxed on the interest. The percentage of taxes you'll pay depends on your filing status, number of exemptions and deductions.

            "So would I owe more taxes the next year on the original million after the 25% witheld?"

            Let's say you won $1 million a couple of weeks ago and got a check for $750,000 today (July 19, 2008). The lottery will withhold $250,000 and give that money to the IRS. You'll either get a form W-2G stating they withheld that amount along with check or the lottery will send it in January 2009. It's the same as if you earned $1 million for the entire year and that would put you into the highest tax bracket which is around 35%.

            Depending on your exemptions, filing status, and deductions, you'll probably owe between 5% and 10% more in taxes. You'll have to write the IRS a check for an amount between $50,000 and $100,000, but you have until April 15, 2009 send them the check. That will give you over 8 months worth of interest by investing all or part of $750,000. That's probably the simplest way to explain it; they withhold $250,000 and you could owe IRS up to another $100,000 on April 15 the following year.

            Talk to a good tax person and might owe nothing and even get a refund.

            But then that is it right? No more tax on the original $1 million, only on the interest if any the following year?

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              Posted: July 20, 2008, 11:41 am - IP Logged

              But then that is it right? No more tax on the original $1 million, only on the interest if any the following year?

              Think of the lottery winnings of $1 million as an "extra weekly pay check". Taxes were withheld, you filed on or before April 15 the following year, and you either got a refund or paid what you owed. Your tax obligations on the $1 million are done just like your tax obligations on every other weekly pay check.

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                Posted: July 20, 2008, 1:06 pm - IP Logged

                S-

                That was a really great descriptive post, nicely done!  I'm going to mark it as one of my favorites to refer back to in the future.

                I would just like to add one caveat to the initial part about owing an additional $75K.  If the person employs the use of tax shelters they can possibly avoid paying additional taxes, and it is not out of the realm of possibility to get a partial refund on that withheld 25%.

                A good tax person can give the winner a list of options that would greatly reduce the additional taxes and possibly give them a nice return. It would be nice to actually have that "problem" and be able to explain how we avoided paying additional taxes.

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                  Posted: July 20, 2008, 1:23 pm - IP Logged

                  After reviewing your Tax situation: If you find yourself in a Tax Bracket greater than 25%: You should consider filing an Estimated Tax Form inorder to avoid the possibility of a Tax Penalty for Under Payment of Taxes.

                  The real problem is when no taxes are withheld like with winning $5000 by hitting a pick-4 straight. In Ohio a player could hit five times, have five different clerks fill out a voucher form, and collect the entire $25,000 the same day without any taxes being withheld. You could get a double hit because it could move you to a higher tax bracket and you would have to write a check on April 15.

                    Raven62's avatar - binary
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                    Posted: July 20, 2008, 1:40 pm - IP Logged

                    The real problem is when no taxes are withheld like with winning $5000 by hitting a pick-4 straight. In Ohio a player could hit five times, have five different clerks fill out a voucher form, and collect the entire $25,000 the same day without any taxes being withheld. You could get a double hit because it could move you to a higher tax bracket and you would have to write a check on April 15.

                    Anytime you receive sizable income where no Taxes have been withheld You should review your Tax situation: If you find yourself owing Taxes: You should consider filing an Estimated Tax Form inorder to avoid the possibility of a Tax Penalty for Under Payment of Taxes.

                    A mind once stretched by a new idea never returns to its original dimensions!

                      justxploring's avatar - villiarna
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                      Posted: July 20, 2008, 1:52 pm - IP Logged

                      Anytime you receive sizable income where no Taxes have been withheld You should review your Tax situation: If you find yourself owing Taxes: You should consider filing an Estimated Tax Form inorder to avoid the possibility of a Tax Penalty for Under Payment of Taxes.

                      I agree....and I know this for sure!  This doesn't only apply to the wealthy.  Even if you earn a small amount of additional income working from home or get a lot of tips at your job, you're supposed to do this so you don't owe much more than $1,000 when you file.  It's a crap shoot.  Most people are never audited, but there are flags that alert the IRS.

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                        Posted: July 20, 2008, 9:21 pm - IP Logged

                        There is no tax on the purchase of a safebox, dude. You know upfront what you paying for on a safebox to park your money. You can convert your winning into several Cashier Check and park it in a safebox in the bank and pay a small measly fee for it and not a DAMN THING THE IRS CAN DO ABOUT IT.

                        I didn't say anything at all about a safe deposit box at the bank, but if you read it again perhaps you'll figure out what I did say. FWIW, rental of a safe deposit box is a service and if your state has a sales tax you can expect to pay sales tax, just as you would when renting anything else.

                          sirbrad's avatar - Lottery-062.jpg
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                          Posted: July 20, 2008, 11:52 pm - IP Logged


                          Yeah I would most likely have a diversified portfolio, I just heard a lot of ridiculous statements about being taxed at 35% each year on one lottery jackpot win, which as I said sounded ridiculous. Not that I would put anything past the IRS. Heck I could live great on a 5% CD over several years from $600,000 up, and compound interest from the scraps.

                          Thanks to all for clearing most of this up. I was only using the money in a safe as an example, but I know some people who do that. I prefer a book or other hidden type of safe, as that is the last place someone would look. Too bad they don't make a book that big lol. I hope to get a lot more helpful advice from the two books I bought about what to do after winning the lottery, when I get time to read them.

                          "Lottery Winner's Guide: When it happens to you, A must for every lottery-playing household."

                          "Infinite Financial Freedom: What to do before and after you win the lottery."

                                     

                          Cheers

                          Just started the Lottery Winner's Guide book, and all I can say is wow! Covers everything from the moment you are holding the winning on. A small little book that gets to the point very quickly, and is very informative about every aspect of the lottery, even taxes, home security, assembling your team, emotions, press conferences, claims process, and much more. Anyone else have this? Can't wait to get through it and move on to the more larger Infinite Financial Freedom book. Big Smile

                            sirbrad's avatar - Lottery-062.jpg
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                            Posted: July 21, 2008, 2:34 am - IP Logged

                            Informative thread, can someone shed some light on the dreadful "gift tax" for me.  How is it that they know what and who you gave money too.  Do they check withdrawls and deposits.  I heard its something like 10,000 or 13,000 is the max a gift can be then a tax has to be paid on it.  Is it just on cash or if I were to purchase things for someone else would the gift tax apply.  Thanks in advance

                            The book I am reading now says you can give $22,000 a year to as many people as you want, it is dated 2006. Course it says "may be liable" if over $12,000 here http://www.irs.gov/newsroom/article/0,,id=107815,00.html 

                            Not sure if it is the same now or more. Not too bad, and in my area that would be a good living for most. You would be giving someone a career! I also love all the tips and sample press conference questions, and how you should dress and act etc. I have been rehearsing those for about 3 years now, and rehearsing is something I am used to. They also tell you how to hold the BIG check. I Agree!


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                              Posted: July 21, 2008, 9:59 am - IP Logged

                              The book I am reading now says you can give $22,000 a year to as many people as you want, it is dated 2006. Course it says "may be liable" if over $12,000 here http://www.irs.gov/newsroom/article/0,,id=107815,00.html 

                              Not sure if it is the same now or more. Not too bad, and in my area that would be a good living for most. You would be giving someone a career! I also love all the tips and sample press conference questions, and how you should dress and act etc. I have been rehearsing those for about 3 years now, and rehearsing is something I am used to. They also tell you how to hold the BIG check. I Agree!

                              So,just how should a person that just won a fortune dress & act at a press conference?