phillips & hunt Jacksonville :
TAXES: WIN THE LOTTERY? UNCLE SAM (AND AUNT SAMANTHA) WILL BE FIRST IN LINE
In this world nothing can be said to be certain, except death and taxes.
-BENJAMIN FRANKLIN, Letter to Jean Baptiste Le Roy, 13 Nov. 1789
If you won $600 or less, these amounts are not usually reported to the IRS, although you are required to self report if it is income. Winnings in excess of $5,000 are subject to a 25 percent federal withholding tax. That means the federal government takes part of its share before you.
You are taxed on what is received, so if you take the annuity option, you are only taxed as money is distributed to you.
But there’s more. 25% is just the withholding. You may find yourself stuck with a big tax bill when you file your taxes for the year. As you will see in the chart below, if you won over $500,000 without other tax exemptions or credits, you would owe taxes of nearly 40%- 39.6% actually. So, you’d need to hold back another 15% to pay Uncle Sam in April.
Many people blow money and wind up not holding this 15% back. It can lead to serious issues, seizures and a host of other problems.
We obtained the chart below from USA Mega. These are the state-by-state withholding rates. We are not responsible for any inaccuracy. Of course, check with your local tax professional to find specific information which applies to you.
As you can see, in 33 states and DC, the lottery agency withhold state income tax. State withholding rates range from 0, where there is no state tax like in Florida to 3.4 percent in Indiana, all the way up to 10.8 percent in New Jersey. The other 16 states don’t tax lottery prizes, have no lottery or have no income tax.
On top of that could be a local (city or county) tax.
These figures don’t even include the local taxes winners could face in various municipalities. Look at New York. The state tax is 8.97%, but you must add in another 3.648% for New York City or 0.897% for Yonkers.
A person’s final tax bill may vary depending on their situation and what they end up doing with the money. Lottery winners who share their jackpot by giving generous gifts to friends and relatives may find they owe gift taxes on top of income taxes. Yes, you owe more because of the gift.
Federal law taxes gifts to individuals that exceed $13,000 per recipient per year. The one who gives the money is the one responsible to pay the gift tax. In addition to the federal gift tax, some states impose state gift taxes. To avoid gift taxes, some advise that you and person who will share in the prize should make a written sharing agreement where they take ownership of certain proceeds before cashing the ticket. That way, that money passes through directly to them.
The income tax on the prize money is affected by whether you claim the lottery prize as an individual or on behalf of a group such as an office lottery pool. Some states permit only one payee per winning ticket. The American Bar Association has advised that if your winning ticket was from a pool or other group, don’t cash in the ticket until you and the other members create a formal legal entity such as a partnership or trust to claim and distribute the prize.
If you formed a company or trust, there are other tax rules which will apply. The point is- do due diligence. Hire a lawyer and tax professional. It will be worth it if it keeps you out of trouble.
Want More Advice?
Be sure to check out our other post – Six Tips from a Lawyer in Case You Won the Powerball Lottery.
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phillips & hunt Results
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Over $1 Million Settlement
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