Cashing in on a $100,000,000 lottery prize will probably give you financial security for the rest of your life. But you might be looking to save as much of this win as possible, especially in the form of cutting down on the taxes you owe.
You can’t negotiate the 24% federal tax rate and your state’s lottery tax fee. What you can do is work around the federal gift tax.
What a Gift Tax Is
Once you cash in on your lottery winnings, there’s a good chance that old friends and family will come out of the woodwork to mooch some of your winnings. But you might be looking to give some money or expensive gifts to those closest to you.
Beware, you might have to pay a gift tax.
And this can cost you up to 40% in taxes on what you choose to give away.
The IRS sets strict rules for what counts as a gift and how much you’re allowed to give out tax-free on a yearly basis. The general rule of thumb is that you can give $15,000 in cash and gifts per person per year.
Though you might want to report these gifts to the IRS just in case, you won’t owe any gift tax if you’re staying within this $15,000 limit per person.
Getting Around the Gift Tax
Getting around the federal gift tax is entirely legal, but you might want to enlist the help of a financial expert to be sure that you’re remaining in the guidelines.
The way around this gift tax is the lifetime gift tax exemption.
The government sets a limit for how much in gifts you can give away over the course of your lifetime. As of 2020, this maximum gift value is approaching $12,000,000.
So, if you’re choosing to give gifts that are greater than $15,000 per year, per person, here’s what you need to do:
- Report it to the IRS by filling out the appropriate forms come tax filing season.
- Apply anything above the $15,000 to your lifetime gift tax exclusion.
- Be aware that going over the lifetime gift tax exclusion might impact your estate.
The most important thing you can do is report your gifts to the IRS to avoid any tax penalties or possible legal consequences. The last thing you want is to look like you’re avoiding taxes.
Other Possible Deductions
Now that you know how often you’ll pay your taxes on your lottery winnings, you probably assume that you’re in the clear and ready to accept your prize. But you might have to give up even more money before you can cash in.
The IRS will first check if you have any debts that you owe the government.
Where You’ll Lose More Money
The government will take any unpaid alimony and child support payments out of your lottery winnings and pay them to the appropriate parties.
Coming into a good sum of money with a lottery win might also impact your current child support and future alimony payments. So, be prepared to shell out even more of your winnings if you happen to have one of these plans in place.
You’ll be able to claim winnings on whatever is left over after your debts to the government have been paid. This is likely going to be most significant if the prize you won is closer to the lower threshold of $600.
How often you pay taxes on your lottery winnings depends on the type of prize you end up accepting. A lump-sum payment will require you to pay the federal, state, and possible city taxes during the year that you accept your winnings. Annuity payment plans will require you to pay taxes on your annual installments.
You also might be on the hook for up to 40% in taxes for gift taxes if you’re not planning out your finances correctly. You should also expect to see less from your winnings if you currently owe in debt, such as child support or alimony.