State taxes - my experiencePrev TopicNext Topic

• winoneday

  

  Canada
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  Jan 16, 2023, 1:23 pm

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  There has been a lot of discussion in the $1.3 billion Mega Millions jackpot thread about how state taxes are applied. Here is my experience.

  I am resident of Canada and on two occasions I won a large enough sum in a US lottery to have the tax applied.

  The state in which I won the prizes had a state lottery tax at the time. I had to pay the state tax even though I was not resident of the state. I was told everyone is obligated to pay the state tax regardless of where they reside. I also paid the federal tax.
• ShagE3

  

  New England
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  Jan 16, 2023, 3:11 pm

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  But what if the state you purchased the winning ticket in had no state tax? You wouldn't have to pay anything. 

  So I living in the USA live in a state with a state tax .... I take a ride to an adjoining state that has no state tax and am lucky enuff to buy the winning ticket to the big jackpot game.  Now I know if I remain a resident of my home state I'll have to pay taxes on my winnings but what if I pick up and move to the no tax adjoining state before I claim my prize?
• winoneday

  

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  Jan 16, 2023, 3:17 pm

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  In response to ShagE3

  Quote: Originally posted by ShagE3 on Jan 16, 2023

  But what if the state you purchased the winning ticket in had no state tax? You wouldn't have to pay anything. 

  So I living in the USA live in a state with a state tax .... I take a ride to an adjoining state that has no state tax and am lucky enuff to buy the winning ticket to the big jackpot game.  Now I know if I remain a resident of my home state I'll have to pay taxes on my winnings but what if I pick up and move to the no tax adjoining state before I claim my prize?

  Correct, if the state had no state tax, then I would have only paid federal tax.

  From my understanding of tax laws, you would pay no state tax in the situation you described.
• SoCola

  

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  Jan 17, 2023, 5:14 am

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  If the state the ticket is purchased in allows tickets to be claimed as a trust, the state you live in couldn't tax the winnings as long as business relating to the trust aren't performed there. So the winning state would need to accept trust claimants and have no tax on winnings. 

   

  Theres an article this week in the New Yorker about how the Getty family avoids 100s of millions of dollars in California taxes by having a trust in Nevada and doing exactly that.
• SoCola

  

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  Jan 17, 2023, 5:30 am

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  Moving to another state wouldn't prevent the state you reside in from pursuing taxes if the winning state has 0 tax unless the winning state required you to choose lump sum/annuity at the time you purchase the ticket because of constructive receipt. Meaning you were entitled to the money while living in that state regardless of when you claimed it.
• KY Floyd

  

  NY
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  Jan 17, 2023, 5:01 pm

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  "Moving to another state wouldn't prevent the state you reside in ... because of constructive receipt. Meaning you were entitled to the money while living in that state regardless of when you claimed it. "

  If you move you no longer reside in the original state. You're certainly entitled to claim a prize before you move, but you're not entitled to the prize until you submit a claim and the lottery validates it. That means you don't have constructive receipt until some point after submitting the claim.
• SoCola

  

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  Jan 17, 2023, 7:53 pm

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  A taxpayer is generally required to include an item of income no later than the time of its actual or constructive receipt, unless the item is properly accounted for in a different period. If a taxpayer has an unrestricted right to demand the payment of an amount, he is in constructive receipt of that amount whether or not he makes the demand and actually receives the payment, as stated in Treasury Regulations section 1.451-2.

   

  Constructive receipt means you have a right to it regardless of when you exercise that right.

   

  Since you have a right to it as soon as you have a winning ticket, you have constructive receipt and have tax obligations to the state you reside in at that moment if you decide to claim it. Moving and claiming it later doesn't change that.

   

  What you described is actual receipt not constructive.
• KY Floyd

  

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  Jan 18, 2023, 7:26 pm

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  Cool. If you win you can demand immediate payment, right?
• Wavepack

  

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  Jan 19, 2023, 1:00 am

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  I love that Trust idea.   Do you have to set up the Trust before you hit the jackpot?   What kind of Trust is best for this?   

  According to Investopedia, 

  • "Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not levy state income taxes, while New Hampshire doesn’t tax earned wages."

  South Dakota has a Registration of Trust cost of $125. 

  From greensfelder.com,

  "States where you can avoid income taxes

  In states such as Kansas you can avoid state income taxes by moving the location of the trustee and administration of the trust to another state. Other states with similar resident trust definitions are Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Mississippi, Montana, New Jersey, New Mexico, Oregon, South Carolina, and Utah.

  Therefore, if a trust is paying income taxes as a resident trust in one of these states, you may be able to avoid it with proper planning.

  Incomplete Non-Grantor (ING) trusts

  This same type of planning (avoiding a trust being treated as a state resident) can also be used to avoid state income taxes on an individual's income. This works by an individual transferring income-producing property to an irrevocable trust that is designed to avoid being a resident trust in all 50 states. In most cases, this planning also only works for individuals living in the states mentioned above."
• SoCola

  

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  Jan 19, 2023, 8:04 am

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  It may depend on the state. But my understanding is the trust only has to be created before its claimed not before the numbers are drawn. 

  I haven't looked at every state but personally I think the best state to win in would be Texas. It allows claims to be both and anonymous and through a trust. It has no state taxes due. And because you have to choose lump sum or annuity when you purchase the ticket, it isn't included as income until actual receipt. There may be other states that also provide the same. 

  I would claim it through an irrevocable trust created in South Dakota. The records of it are completely sealed and allows for decanting and more flexible changes.