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Lower Tax Burden for Winners?

Topic closed. 10 replies. Last post 11 months ago by Think.

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Espanola
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Posted: January 10, 2016, 9:50 pm - IP Logged

We all know that the fed tax is 39.6% plus whatever your state takes as well

Ideas to lower your tax burden:

Donations to church:  Most people donate 10%.   How would a 10% donation lower one's tax burden 

Charities in general

Irrevocable trusts(do these play a factor?)

--------------

 

Or is it better to just have the feds take 25% withholding only and move out of the US and have the IRS try and hunt you down for the remainder in a country where the IRS has no jurisdiction.

    ArizonaDream's avatar - Lottery-009.jpg

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    Posted: January 10, 2016, 10:47 pm - IP Logged

    I just heard about someting called the Pease limitation on itemized deductions. It seemed rather complicated, but apparently you won't be able to deduct as much as you might have expected.

      Think's avatar - lightbulb
      Marquette, MI
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      Posted: January 11, 2016, 12:42 am - IP Logged

      I just heard about someting called the Pease limitation on itemized deductions. It seemed rather complicated, but apparently you won't be able to deduct as much as you might have expected.

      There are many things to consider.  One is the  extra 3.8% Obamacare tax that kicks in around $250,0000 and  another is the Pease fine (kicks in around $300,000).

      Effectively, with these big jackpots, what the Pease fine does is  it fines you about 33% of your charitable contribution.  Thus for every $3 dollars you give to charity you have to pay a $1 in fines to the U.S. Government.

      eg  If you give away $3 million then you pay a $1 million fine.

      At any rate its just another reason you need a tax attorney on your team if you win.

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        NY
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        Posted: January 11, 2016, 3:00 am - IP Logged

        Another good reason to consult a professional is that the advice you get on internet forums may be simplified, or even wildly inaccurate.

        For example, the 3.8% tax is actually called the "Net Investment Income Tax" because it applies to investment income. If you win the lottery the prize money is regular income, not investment income, and isn't subject to the extra 3.8% tax. Even if it was potentially subject to the tax, the tax is based on the lesser of your adjusted gross income above the threshold, or the investment income. That means a lottery prize of $100 million would only be subject to the tax if you also earned at least $100 million in investment income.

        Similarly the Pease limitation doesn't "fine you about 33% of your charitable contribution." It reduces the maximum allowable deduction by 3% of income beyond the threshold, so the worst  that it does is reduce the tax benefit of making a contribution (or the effect of any other deduction, such as mortgage interest). What that means is that the more you give to charity (or pay in mortgage interest) the larger your deduction and the less effect the Pease limitation has. In some circumstances you could lose all of your deductions and pay the maximum 39.6% income tax despite making a charitable contribution, but you'd be paying that tax anyway if you didn't make the contribution.

        That last brings us back to the original question about reducing you taxes.  A modest contribution may not reduce your taxes, but whether it reduces them or not every dollar you give away is a dollar you don't have. If you give a million dollars to charity you're going to have even less money than if you kept the money and paid taxes on it. That means the  only reasons to give money to charity are because you want the charity to have the money or because you'd rather throw money away than pay taxes on it. If you want to give money to charity you may decide to tax the tax implication into account in determining how much to give, or you can just figure the maximum cost of the donation is the actual size of the donation. If you  just want to keep as much for yourself as possible  you'll skip the donations and look at whatever legal strategies exist for reducing taxes on the money you're keeping.

        Even if the advice you get on the internet is 100% accurate it doesn't necessarily apply to  your specific circumstances.

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          Espanola
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          Posted: January 11, 2016, 9:14 am - IP Logged

          Good points.   I did the easy thing and just plugged in numbers into TurboTax.

          Assuming the cash value reaches 1 billion and I take the lump sum and for simplicity purposes I am not counting state liabilities.

          Obviously if I make no donation, I am on the hook for the 39.6% rate.  BTW I found out not all my winnings would be taxed at 39.6....only the amount over 400,000.   Irrelevant in the grand scheme of a billion jackpot where the majority falls in the 39.6 bracket but still.

          The rough estimate was around 396,000,000 of fed tax liability assuming no deductions, etc.

          If I make the donation of 100 million to my church, then I am approx paying 356,000,000 in federal taxes plus the 100,000,000 "donation"  Basically my 100 million donations saves me about 40 million give or take that I don't pay the feds.  Pretty sure there are other deductions possible besides the charity one but unsure if they would make a dent in the grand scheme or not.

          So yeah hiring a CPA and a financial firm to handle the numbers is probably a smart idea.    Hopefully fee-based instead of commission.  Only way I would pay commission to professionals is if they are making me marginal revenue

          Curious what a reasonable fee/salary would be for someone or a team to work for me on this endeavor assuming I win.  Would $100,000 annually be low-ballin the fees for the labor?  I assuming Merill Lynch, GoldManSachs, etc are better than going thru the phone book and google route for the CPA/finance pros...right? An attorney to write me an ironclad will or trust so no future wife or sue-happy person gets lucky.

            Think's avatar - lightbulb
            Marquette, MI
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            Posted: January 11, 2016, 1:01 pm - IP Logged

            Most people do not understand that the way Obamacare was passed by the supreme court is that the supreme court established that taxes were really fines.

            There also is some good tax information on the internet -

            http://taxfoundation.org/article/2016-tax-brackets

            Also on Pease -

            http://taxfoundation.org/blog/pease-limitation-itemized-deductions-really-surtax

            until Pease has phased-out 80 percent of the value of the itemized deductions.

            80 percent of 40 (.396) percent is about 33%  3000000*.8 *.396 = 950400 or about a third of your contribution in fines to the US Govt

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              Posted: January 11, 2016, 2:30 pm - IP Logged

              There is no fine associated with the Pease amendment

              Let's take an example, you have an AGI of $100M from the lottery and no deductions

              You will pay approx $40M in federal taxes

               

              Now let's say you were very generous and donated $50M to a charitable organization and that is all your deductions

              Your charitable deductions have to be reduced by the lesser of 3% of the amount you are over the Pease limit (roughly $100M) , $3M

              OR 

              80% of your charitable deductions, $40M

              Since $3M is smaller than $40M your $50M deduction is reduced to $47M and you pay taxes on $53M of approx $21M

               

              So so saved $19M in taxes for making that $50M contribution instead of saving $20M prior to the Pease Amendment.

               

              You are not "fined" $1 for each $3 of that large contribution

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                Posted: January 11, 2016, 2:43 pm - IP Logged

                Most people do not understand that the way Obamacare was passed by the supreme court is that the supreme court established that taxes were really fines.

                There also is some good tax information on the internet -

                http://taxfoundation.org/article/2016-tax-brackets

                Also on Pease -

                http://taxfoundation.org/blog/pease-limitation-itemized-deductions-really-surtax

                until Pease has phased-out 80 percent of the value of the itemized deductions.

                80 percent of 40 (.396) percent is about 33%  3000000*.8 *.396 = 950400 or about a third of your contribution in fines to the US Govt

                Not going to argue whether a tax is a fine but the Pease Amendment uses the lesser of 3% of the amount your income is over the Pease limit or 80% of your charitable contribution.

                The 80% rule only comes into play if your charitable contributions are roughly less than 3.75% of your adjusted gross income. 

                If you have an AGI of $100M and donate more than $3.75M then the 80% rule doesn't apply and you essentially only lose the deduction on that first $3.75M, every dollar of every contribution over that you get full credit for.

                The math works like this (for very large AGI where we can treat the Pease threshold as zero to keep the math simple):

                AGI * 3%/0.8 = amount of your deductions that will be excluded if your deductions exceed that exclusion amount

                The Pease Amendment is effectively a 39.6 * 0.03 = 1.188% tax increase on charitable contributions, not the 33% you attribute to it

                  SilverLion's avatar - 8ball

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                  Posted: January 11, 2016, 3:45 pm - IP Logged

                  We all know that the fed tax is 39.6% plus whatever your state takes as well

                  Ideas to lower your tax burden:

                  Donations to church:  Most people donate 10%.   How would a 10% donation lower one's tax burden 

                  Charities in general

                  Irrevocable trusts(do these play a factor?)

                  --------------

                   

                  Or is it better to just have the feds take 25% withholding only and move out of the US and have the IRS try and hunt you down for the remainder in a country where the IRS has no jurisdiction.

                  Self Picks should be taxed as Capital Gains ( I think 15%)

                  Quick Picks should be taxed as Income (I think as you say 39.6%)

                  That I think would be fair.

                    MegaWinner's avatar - Lottery-029.jpg
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                    Posted: January 11, 2016, 4:17 pm - IP Logged

                    At the end of the day, even if the gov took 50%, I'd still have a helluva lot more money than I did before! 

                     

                    Good luck everyone!  ????

                    Sun Smiley I got my fingers crossed ready to win!!! Sun Smiley

                      Think's avatar - lightbulb
                      Marquette, MI
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                      Posted: January 11, 2016, 11:03 pm - IP Logged

                      Not going to argue whether a tax is a fine but the Pease Amendment uses the lesser of 3% of the amount your income is over the Pease limit or 80% of your charitable contribution.

                      The 80% rule only comes into play if your charitable contributions are roughly less than 3.75% of your adjusted gross income. 

                      If you have an AGI of $100M and donate more than $3.75M then the 80% rule doesn't apply and you essentially only lose the deduction on that first $3.75M, every dollar of every contribution over that you get full credit for.

                      The math works like this (for very large AGI where we can treat the Pease threshold as zero to keep the math simple):

                      AGI * 3%/0.8 = amount of your deductions that will be excluded if your deductions exceed that exclusion amount

                      The Pease Amendment is effectively a 39.6 * 0.03 = 1.188% tax increase on charitable contributions, not the 33% you attribute to it

                      Beautiful!

                      Thank you dddwww.  Welcome to the LP!

                      I hope anyone reading this now fully realizes my point.

                      The point being to hire a professional preferably from a big law firm that deals with this stuff.

                      Most people don't really stop to ponder the idiocy of the way our tax system works.  One way to possibly remedy this would be to have taxes due on election days.

                      A complex convoluted, clunky, junky tax code sure wastes a lot of productivity and causes lots of mistakes and unnecessary angst.

                      The tax code certainly can be better and easier to understand but until it is revamped  spend the money to get tax attorneys when you hit the big one.