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gogidolim

Inland Empire
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Jul 16, 2015, 2:02 am

I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?
darthfury78

homestead
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August 14, 2014
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Jul 16, 2015, 2:29 am

Quote: Originally posted by gogidolim on Jul 16, 2015
I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

The IRA is contribution is capped at $6K a year. The best thing to do with your winnings is take the lump sum. Once the 25% tax is deducted, invest that money into one single stock, like Disney or Apple and let it grow to around 35% of what you paid for it. From there, use the gains to pay Uncle Sam. This way,you do not have to touch the principal. Just the capital gains that's used to pay the remaining 15% of what you owe.
KY Floyd

NY
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Jul 16, 2015, 3:39 am

Even if you could invest .75 million in an IRA it wouldn't save you .75 million in taxes. At best it would just make that .75 million non-taxable. That would leave you with 4.25 million in taxable income, so at 39.6% you'd owe 1.683 million. That's still another 443k beyond the 1.25M withholding.

Depending on whether or not you're covered by a retirement plan at work or if you're self-employed you may be able to make a bigger contribution. Still, even if you could contribute 100k you're only going to save the $39,600 that you'd otherwise pay on 100k. It's not pocket change, but it's not much in the context of taxable income that's 50 times as much.

This is just one reason to get competent help if you were to actually win a significant amount of money.
OldSchoolPa

Gurnee, Illinois
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February 12, 2007
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Jul 16, 2015, 3:52 pm

Quote: Originally posted by gogidolim on Jul 16, 2015
I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

You really should consult a team of financial professionals. An IRA is an Individual Retirement Arrangement which merely provides shelter from taxes. A financial professional can cover the caveats and limits. However, if I won millions, I would rather focus on paying taxes due on the winnings and devote time to travel and family while I plan my future endeavors like attending business school, starting a business, etc.

Get MONEY!!! Winning a JACKPOT lottery is one MIRACLE I desire for 2019!!! NOW come to my subconscious mind you 6 winning numbers!
gy65

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March 9, 2006
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Jul 16, 2015, 4:40 pm

Winnings are not earned income.
myturn

Bondi Junction
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Jul 16, 2015, 8:34 pm

Quote: Originally posted by darthfury78 on Jul 16, 2015
The IRA is contribution is capped at $6K a year. The best thing to do with your winnings is take the lump sum. Once the 25% tax is deducted, invest that money into one single stock, like Disney or Apple and let it grow to around 35% of what you paid for it. From there, use the gains to pay Uncle Sam. This way,you do not have to touch the principal. Just the capital gains that's used to pay the remaining 15% of what you owe.

I'm not sure about "one single stock", spread the risk across various industries.

We all get a lot out of lotteries!
myturn

Bondi Junction
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December 24, 2007
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Jul 16, 2015, 8:43 pm

Quote: Originally posted by gogidolim on Jul 16, 2015
I am reading an article on how to avoid maximum tax bracket. One good way is to invest in IRA and this can be a tax write off. So...

Let's say I won a 5 mil scratcher in CA. The inital federal tax is 25%. I can live with that. But for the rest of 15% for the tax bracket...hmm...

I would pay 1.25 mil when I receive the check, and have to pay another 0.75 mil next year. But if I invest that 0.75 mil in IRA, then do I avoid paying that for the rest of tax bracket?

Before doing anything, winners should get independent, professional financial advice. Make sure they are independent, not sales people getting commissions for pushing a product. Don't be afraid to get second opinions.

We all get a lot out of lotteries!
Raven62

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Jul 16, 2015, 11:20 pm

Quote: Originally posted by gy65 on Jul 16, 2015
Winnings are not earned income.

http://www.irs.gov/uac/Reporting-Gambling-Income-and-Losses-on-Your-Tax-Return

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

Catch-22: A dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Corruptissima re publica plurimae leges: When the republic is at its most corrupt the laws are most numerous.

The best way to learn is to never stop being an Experiential Student!
KY Floyd

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Jul 17, 2015, 12:06 am

Quote: Originally posted by Raven62 on Jul 16, 2015
http://www.irs.gov/uac/Reporting-Gambling-Income-and-Losses-on-Your-Tax-Return

And? Is that just your way of telling us you don't know the difference between income and earned income?
Raven62

25

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Jul 17, 2015, 1:36 am

Quote: Originally posted by KY Floyd on Jul 17, 2015
And? Is that just your way of telling us you don't know the difference between income and earned income?

Is this your way of saying if you win a Jackpot that you'll still be entitled to the Earned Income Tax Credit (EITC)?

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

Catch-22: A dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Corruptissima re publica plurimae leges: When the republic is at its most corrupt the laws are most numerous.

The best way to learn is to never stop being an Experiential Student!
DELotteryPlyr

Maryland
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January 2, 2015
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Jul 17, 2015, 4:51 am

Quote: Originally posted by myturn on Jul 16, 2015
I'm not sure about "one single stock", spread the risk across various industries.

Yes, you need to be diversified.

You have done a great job starting your research. Keep going, keep reading and talking to people. You will find investments which you are comfortable with. Just watch out for 'its too good to be true' - it most likely is.

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