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Planning On Winning A Jackpot?

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Chewie

Its time for the refresher course:http://www.williamsmullen.com/news/articles_detail/019.htm

The Morning After: Tax Planning for Lottery Winners

A consideration for each dollar you plan on winning.

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LotteryPlayer

Interesting article, Chewie.  It's very informative.

This paragraph will probably surprise some people:

"Many lottery winners, especially large prize winners, are often dismayed to learn that, even after their lottery prize is substantially reduced by income tax withholding, they may be required to pay additional income tax. Given the disparity between the 28% federal withholding rate and the 39.6% top marginal income tax rate for individual taxpayers, many large prize winners will have to pay more in income tax than the amount originally withheld."

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CASH Only

Interesting article, Chewie.  It's very informative.

This paragraph will probably surprise some people:

"Many lottery winners, especially large prize winners, are often dismayed to learn that, even after their lottery prize is substantially reduced by income tax withholding, they may be required to pay additional income tax. Given the disparity between the 28% federal withholding rate and the 39.6% top marginal income tax rate for individual taxpayers, many large prize winners will have to pay more in income tax than the amount originally withheld."

The article must be outdated. Federal withholding is now 25%.

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Chewie

How did you come up with that? The Bush reduction? It is about to expire and he is out of tokens to maintain it.

hypersoniq's avatar - binary
hypersoniq

top rate is currently 35% this is for income in excess of $163,225

in my calculations I overestimate at 40% (makes it easier for quick calculations)
sirbrad's avatar - Lottery-062.jpg
sirbrad

Yes I also posted this too awhile back. Good article. The federal witholding here is also 25%, with no state, or local tax. Smiley

sirbrad's avatar - Lottery-062.jpg
sirbrad

What if one takes a lump sum, and invests it in a regular checking account that accumulates no interest? Would you still be taxed every year? Do you pay 35% of your winnings every year? If so, that is a crock of crap.

Although you would still have far more money than if you would not have won, the tax crap does put a damper on the windfall. I guess it is safe to say that the IRS does not play the lottery, they win everytime someone else does. Besides I doubt they would tax themselves.

hypersoniq's avatar - binary
hypersoniq

in a lump sum distribution, they only pay you once, therefore it is only income once...

after that, you only pay taxes on the interest earned, but the principal has already been taxed.

And PA does withhold 25%, but if it is over the amount above, you are responsible for paying the other 10% within the tax year of your win.

sirbrad's avatar - Lottery-062.jpg
sirbrad

True but as I said, "What if one takes a lump sum, and invests it in a regular checking account that accumulates no interest?" What if one was content with spending the principle, and did not want to bother with interest? I know for an absolute fact that I would never spend millions in principle, not even close, plus I have no family really, or dependents. So I would actually have no problem living off the principle. I would not want anyone else getting the money anyway.

But it seems that the more money most get, the more they want. I would not mind the interest, as long as I still came out ahead in the end.

BaristaExpress's avatar - BaristaExpressMX zpsfb0d8b5d.png
BaristaExpress

No interest earned, No Income Tax on the money! As long as the principle earns you no income, then you can't be taxed on it! It's just that because the IRS took the first 25% doesn't mean you don't owe any additional tax, because you do, try like another 13% at the end of the year! With that kind of money your now in the 38% tax bracket! The IRS just gets the bulk of the money owed on your sudden wealth upfront is all.

sirbrad's avatar - Lottery-062.jpg
sirbrad

Would you still have to pay 13% every year after that? Or just once? As I said though, I could live off the principle forever, but I would not mind living off the interest. So as long as the interest is higher then the taxes would be?

I heard that the one winner of the Powerball on the TV show I posted about here, (David Edwards I think,) accumulates about $14,000 a day interest! That is like $5 million a year! What would be the taxes on that interest? He must have some really good investments, as he won$74,750,000, but I believe he was one of 3 winners. So if he selected the lump sum I don't see how he gets that much in interest. Unless he gets 10% or more.

http://www.enquirer.com/editions/2001/08/28/loc_ky_powerball_winner.html

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Chewie

I would think that %10 would be about average. 

But don't forget the expense of money.  Lawyers for multi-millionaires don't come cheap.  Financial Advisers don't work for peanuts.  The going rate for a compentent CPA has to be big numbers. 

If you have half a brain, you've set up an LLC (or something similar) and the expenses of the LLC are deductible; just like any business.  If you follow the Trump rule, you never spend your own money, you borrow and spend some one elses.  Then you make the profits on the good deals, and declare bankruptcy on the bad deals.  Money comes in, never goes out; except for divorces.  Follow the Disney World rule of business, hire your close relatives and friends at the maximum salary allowable, tack on hiring bonuses, expenses, and incentives.  Then, after a short period, fire them, pay them a termination bonus, and allow them to keep the houses and cars as losses.  Then deduct as a business loss.  Then there are off-shore trusts that the Kennedy's and Kerry's have perfected. 

Lots of ways.  All you need is the one win to get you into the diner where the big boys eat.

BaristaExpress's avatar - BaristaExpressMX zpsfb0d8b5d.png
BaristaExpress

Sirbrad,  No interest earned, No Income Tax on the money! As long as the principle earns you no income, then you can't be taxed on it!As you asked and answered your own question>> Would you still have to pay 13% every year after that? << Answer is NO! Or just once? <<< Yes, on the one time to make up the difference of what wasn't taken when the IRS took their first 25%.

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Lawrence Connor

this is somewhat confusing and dismaying  Confused

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Chewie

I would think that you would have to make an exceptional effort to not make money on a multi-million dollar win.  The only way I can think of, is by not claiming it. 

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