Winning a big lottery is indeed an
occasion to celebrate, but it can also be a very trying time when it comes to
taxes. States that conduct lotteries provide winners with an option for a
lump-sum payout, although many winners choose annual installments instead.
In this context, you are not the only
person out celebrating as Uncle Sam is sure to join in your celebrations, when
you happen to make a big win via the lottery since the winnings are indeed taxable.
Winnings over and above $5,000 are exposed to mandatory income tax withholding. Besides, state
lottery agencies have to report wins over $600 to the country’s Internal Revenue
Service and their tax lawyers will make sure they do. Even broke states like
California, New York, and New Mexico have to send the right amount to
Washington DC much to their chagrin.
Actually, almost all states must send
money to DC and they are not too happy about that since the waste and fraud in
DC has never been higher but let’s not digress too much.
The
Big Tax Bite
As soon as you win the lottery, the
lottery agency has to withhold 25% percent of the amount towards federal income
taxes. Apart from this, lottery agencies in 34 US States will withhold state
income tax, ranging from 3.4 to 10.8%. However, the lottery agencies belonging
to the other 16 states refrain from taxing lottery prizes, and so are free of
any lottery or income tax. There is a better chance these people in these states
are living more prosperous lives as well.
Lump-sum lottery winnings remain
taxable, just as traditional income, in the same year as the jackpot is won,
and there are no kinds of exemptions granted in the form of reduced tax rates
when it comes to lottery jackpots. Since 2012, the highest federal income tax
rate remains 35% which is so many jobs remain and are sent overseas, and this
is applicable to every taxpayer without taking into consideration the filing
status, whenever taxable incomes exceed $398,350.
However, the lottery agencies in general
withhold only 25%, so that you are stuck with a huge tax bill at the time of
filing your taxes if you don’t set aside some of the jackpot money, as any tax
consultant will inform you.
Out
of Nowhere
Make sure your family members know this
since you know if you become instantly wealthy you will be receiving a lot of
calls from them about some new business venture they want you to bankroll for
them. You will probably be receiving phone calls from family members you do not
even know and perhaps none of your family knows. You will probably be receiving
phone calls from friends you never met or friends you have not seen since you
were a sophomore in high school, for example.
They should all know that what they
think you own and what you actually have are two different things. On top of
this, they do not need to know any of us this anyhow unless you do owe them
some money from past transactions. You should pay off all your debts before you
spend any of this new money.
Group
Winners
The income tax payable on the lottery
jackpot is indeed affected whether you claim it as an individual or by
representing a group of persons such as an office lottery pool. Most states
allow only one payee for every winning ticket.
Expert tax lawyers suggest that, if the
winning ticket is from a group or pool, refrain from cashing your ticket until
you along with the other group/pool members enter into a formal legal trust or
a partnership, before distributing the prize amount. Or else, you will become
liable for the whole income tax bill as you claim the winnings and can also be
stuck with gift taxes while distributing the jackpot. However, with a duly
signed legal entity, every member will be liable solely for his/her share of
the prize amount.
Gift
Taxes
Another thing to remember is that, if
you win a lottery and share the jackpot in the form of generous gifts to your
close relatives, you will have to pay gift taxes, besides the income taxes, as
the giver is liable to pay the gift tax. Besides this, your state might
also impose gift taxes – you may want to move after pay them their money. Why
live in greedy states like California, Washington State, New Mexico, Oregon, Massachusetts,
and so on? So the best thing is to create a duly written sharing agreement with
your relatives, before claiming the prize amount.
Under the circumstances, it is wise to
hire a tax lawyer well versed in lottery ticket laws to represent you and help
you do this right. You can do so right here: http://tax-lawyers.usattorneys.com/. Make sure you buy
a large and heavy safe too so you can store some of the guns, gold, and so on
you are going to buy and should buy.
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