Uncle Sam. So, you have a pool at work that plays the big Power Ball lottery game. Who gets what if you have a winning ticket? How much do you pay Uncle Sam in taxes?
What do you need to do to protect your estate?
Winning the Big Money in a Lottery Pool
So you’re in a group with coworkers and family members and decide to play the big Power Ball lottery game. And you have a winning ticket! What you should know about getting paid and paying out.
Splitting up the Dough
In some states, you can purchase lottery tickets in several names. If a ticket purchased in the name of several people wins, all the people split the money. In other states, a ticket isn't purchased in anyone's name. It's a bearer instrument, meaning that whoever holds the ticket can claim the prize money. If you want to split the prize money, you have to create a lottery pool before you purchase tickets. Here's an example of how a lottery pool may work:
- ·Several people pool their money to buy lottery tickets
- ·You record the name of each person and the amount he or she contributes
- ·You buy the lottery tickets
- ·You make photocopies of the tickets, which you give to each person in the pool
- ·If one of the tickets wins, the prize money is split among all contributors
Barbara creates a lottery pool among 15 coworkers.
Barbara collects $100 from the coworkers, keeps careful records, and buys 100 lottery tickets. One of the tickets is worth $1 million. This means that Marcia, who bought 1 ticket, receives 1/100 of the total prize, or $10,000. But Shenequa, who bought 10 tickets, receives 10/100 (1/10) of the total prize, or $100,000.
In some states, you can choose to receive your winnings as an individual or a club. If you have this choice, it's generally best to divide your winnings among several family members (assuming that you want to share). This will lower your potential estate tax liability. If, when you die, your estate is worth less than your remaining basic (applicable) exclusion amount (the basic exclusion amount is $5,120,000 in 2012), your estate will not owe any federal gift and estate tax. However, if your estate is worth more than this exemption amount, it may owe this tax (and there may be transfer taxes on the state level as well. So, if you can split the winnings among family members, you may be able to reduce or eliminate potential transfer taxes.
Collecting Your Winnings
You are subject to income tax on lottery winnings in the year you receive the prize money, not the year you win the lottery. So, if you buy a lottery ticket for a game played on November 15 of Year 1, and you receive the prize money on November 30th of Year 1, you will be subject to income tax on your lottery winnings in Year 1.
In contrast, if you don't receive the prize money until January 7 of the next year (Year 2), you will then be subject to income tax on the winnings in Year 2. You can then invest the money in a short -term vehicle and collect enough interest on the money to pay some of the income taxes you will owe when you file your tax return for Year 2.
Short -and long term financial planning
You'll need to develop a financial strategy based on the amount you've won, your needs, and your short and long term goals. Your overall strategy will depend on your needs.Good luck!