Taxes

[Guest]

Neal Wanless, a 23 yo rancher from S.D. just won 232 million in the Powerball lottery. The newspaper reported that he'll take a lump sum of 88 million after taxes. That equates to a tax rate of about 62 percent! Is there some sort of windfall penalty that results in a 62 percent tax rate? That tax rate is about what most Europeans pay (and get cradle to grave health care, free education and more).

[Guest]

The value of a lottery winning is generally posted as if the winning were to occur with annual payments over a 30 year period. When the winning is taken as a lump sum payment the value is reduced to reflect this method. The taxes are then paid on that winning which results in the final listed value.
The calculation of the tax rate in the previous posting is inaccurate.

[Guest]

The value of a lottery winning is generally posted as if the winning were to occur with annual payments over a 30 year period. When the winning is taken as a lump sum payment the value is reduced to reflect this method. The taxes are then paid on that winning which results in the final listed value.
The calculation of the tax rate in the previous posting is inaccurate.
Spot on! If a single payment, the taxes are based on the cost of the annuity the lottery would buy to provide a XX-year payment schedule of $___ per year.

[Guest]

The value of a lottery winning is generally posted as if the winning were to occur with annual payments over a 30 year period. When the winning is taken as a lump sum payment the value is reduced to reflect this method. The taxes are then paid on that winning which results in the final listed value.
The calculation of the tax rate in the previous posting is inaccurate.

Think of it as the total payout of a 30 year Fixed Immediate Annuity(SPIA), compared to the purchase price of the annuity.

[Guest]

And if I'm not wrong, no matter where he puts that many, except maybe if he got real cold cash, that money will continue to get beat-up with taxes.

Keedy

[Guest]

my question refers to Keedy's comment. Once a lottery winner takes the money in a lump sum and pays the taxes...is he/she taxed on that money every year thereafter too?:shrug:

[Guest]

He would only have to pay taxes in the following years on the interest he receives from his investments. How if he puts the money in coffee cans he pays no taxes.

It would be a hard call as to where to put that much money but I bet there are thousands of hungry money managers wanting a piece of that action.

[Guest]

At the rate the economy is going...he better start drinking alot of coffee!!!!

[Guest]

At the rate the economy is going...he better start drinking alot of coffee!!!!

:agree: With inflation rearing it's ugly head...he may need to invest in a wheelbarrow to purchase a loaf of bread.:cus:


Keedy

[Guest]

Either way, is there anyone who wouldn't want to be in that "tax" position.

[Guest]

I predict that the price of a gallon of gas will soar to over $4.00 a gallon in the very near future. That will mean that prices on goods will have to rise, also. That will mean that your dollar won't go as far so you have inflation.
We voted for change...and were going to get it.

Keedy

[Guest]

about those taxes???

I have always thought that if winnings like that should come my way, I would grab a really good attorney and a really good accountant and set up a blind trust, or whatever it is called, to receive those winnings. But I have to wonder if that is not done because the lottery commission does not allow it because the lottery wants and needs the associated publicity or because most people want everybody to know (I sure wouldn't) or because most people don't think about such a thing or because taxes on trusts are especially wicked.

Don't know the answer. It might be all of the above. But I do not think I will ever need to know the answer.

Boomer

[Guest]

Sounds like too many headaches to me. Glad I never won the lottery.:0000000000luvmyhors

[Guest]

My father had what he thought the perfect lottery formula was:

1. Verify the numbers
2. Go to Tallahassee to collect the money
3. Change your name (to heck with mooching relatives!)
4. Abandon the stuff you had, house and furnishing included
5. Move somewhere else and buy everything new (let them try to find you!)

Unfortunately, he never got to work the plan....

[Guest]

I predict that the price of a gallon of gas will soar to over $4.00 a gallon in the very near future. That will mean that prices on goods will have to rise, also. That will mean that your dollar won't go as far so you have inflation.
We voted for change...and were going to get it.

Keedy

It has already been to over $4 a gallon, remember.... a year ago?

[Guest]

If the young man invested the $89 million in a safe (what's "safe" these days?) investment yielding, say 5%, his reported income would be $4.45 million per year, more in future years if he doesn't spend it all. With no deductions, he'd be in the maximum tax bracket, 35%.

There'd be some personal deductions and exemptions and whatever magic a sharp accountant could pull off, but let's say he actually paid the taxes at the maximum rate. He'd still have after-tax income of almost $2.9 million per year. That's $242,000 a month, $56,000 a week, over $8,000 a day.

Sounds like a sweet deal to me. Other than buying a lottery ticket and getting lucky, did the winner contribute anything to society or his community by winning the lottery? I guess I might query, why shouldn't he pay taxes at the maximum rate?

I might even go so far as to propose that a "special" maximum tax rate of 75% be enacted to apply to gambling winnings. Not only would it help balance the federal budget, but it might serve as a deterrent to those that can't afford to house, feed and educate their families from gambling away the rent money.

[Guest]

It has already been to over $4 a gallon, remember.... a year ago?

?????? In the scheme of things..what does that mean? It was once 32 cents a gallon. I think $4.00 is a conservative figure...how about $6.00?:crap2:

Keedy

[Guest]

about those taxes???

I have always thought that if winnings like that should come my way, I would grab a really good attorney and a really good accountant and set up a blind trust, or whatever it is called, to receive those winnings. But I have to wonder if that is not done because the lottery commission does not allow it because the lottery wants and needs the associated publicity or because most people want everybody to know (I sure wouldn't) or because most people don't think about such a thing or because taxes on trusts are especially wicked.

Don't know the answer. It might be all of the above. But I do not think I will ever need to know the answer.

Boomer

Here in Ohio a lot of people do set up a blind trust just so their names are not out to the public. The Lottery Commission does not like that when they have a big pot as they want the free advertising that comes with the photo op of the check presentation. This even happened a few times when lottery pools hit. No photo op. Also if the ticket is claimed by a trust even the trust name is not reveled. The trust is the best way of keeping the information private.

[Guest]

Most often, a blind trust is used when the beneficiary of the trust is in a position where he/she cannot or should not be involved in investment decisions because of the possibility of a conflict of interest. Blind trusts are used quite frequently by those who hold elected office. A blind trust is a trust in which the fiduciaries who make all the investment decisions have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust and no right to intervene in their handling, including any investment decisions. Another reason for a blind trust is, as Hawkwind points out, is an attempt to disguise the name of the beneficiary of the trust.

But the concept of a blind trust to avoid taxation on any form of income, including gambling winnings won't work. The IRS is standing right there, before the winnings are distributed, requiring that the proper amount of taxes be witheld prior to any distribution. The same thing even happens in Las Vegas casinos. There's a lower limit, I think, but for any winnings of a significant amount, the proper amount of taxes are required to be witheld by the casino before any distribution to the winner.

The young rancher/winner chose the lump sum distribution. So the first step was for the lottery to calculate the present value of his winnings. I don't know what discount rate they used to make the calculation, but the effect was that his winnings as a lump sum were calculated to be about $120 million instead of the $232 million had he agreed to take his payments as 30 annual payments of about $7.75 million.

The taxes the winner would pay on either payment approach would be required by the IRS to be deducted prior to the winnings being distributed to the winner. Again in this case, his lump sum award was about $120 million, which was then reduced by the maximum tax rate of 35% to the $89 million he's going to get "after taxes". Even if he chose to take 30 annual payments, the taxes would be witheld prior to him receiving his annual distribution. That approach raises another risk to the winner: choosing the annual payments means that he would pay federal taxes at the rate in effect during the year of each distribution. So, if the maximum tax rate were to increase from the 35% it is currently, the winner would pay whatever rate was in effect that year.

Given the amount of our national debt, it seems to me that the chances of the maximum federal tax rate increasing rather than decreasing is pretty high. Given that the maximum tax rate is near a historical low, his choice to take the lump sum seems to be a sound one.

Once he gets the after-tax proceeds of his winnings, that would be the time he might choose to use an investment vehicle such as a blind trust. Given the high number of lottery winners who somehow seem to fritter away some pretty sizeable amounts of money, the young fellow might be wise to set up a trust with a major bank or trust company which would handle the invrstment of the money, and also its distribution. Having a knowledgeable trustee standing betwen the winner and his money would protect him from the onslaught of both goofy investment ideas as well as appeals for money from hundreds of "charity cases" who will appeal to him for a handout.

[Guest]

VK,

Thanks for elaborating on the blind trust definition. I knew that such a trust would not avoid taxes. But I did not know the definition of 'blind' applied to the beneficiaries' lack of involvement in the investments of the trust. My hypothetical on what I would do had to do with the second part of your explanation. Not letting anybody know I had that money. I would filter it through a trust.

So few people are qualified to handle a large sum of money that comes via windfall. The waters are shark infested. And the term "nouveau riche" can only begin to define the behavior of so many thrust into such situations. I remember reading about a guy who accepted the house instead of the money for that HGTV Dream House promotion. It was a nightmare. He was eaten alive by taxes and displacement. They should throw in legal and tax advice with those prizes. But they don't. It's all about the publicity.

Anyway, back to trusts and taxes. Not only did I not think the blind trust could avoid taxes, I also have been given the impression that trusts can sometimes engender even more taxes. When a trust is used for estate purposes, isn't income often spun through to the beneficiaries to be taxed at the individual rate rather than the trust rate. A different kind of trust. I know. But getting income out of the trust is the way it needs to work sometimes for tax purposes, as I understand it. But, of course, taxes get paid. I know that.

I know there are all kinds of trusts. I do not know a whole lot about any of them. But I do know that they have their purposes. And anyone charged with handling a serious amount of money needs to have sense enough to find out what the options are. But when that money comes totally from a windfall, completely unexpected, the emotion of the moment too often overrides good sense.

(You know. I just realized this thread is in Political. Uh Oh. I thought I was in the investment forum.)

Anyway, thanks for completing the definition of blind trust for me, VK.

Boomer

[Guest]

what they bought.....did I miss the enactmnet of the bailing out of our dependence on foreign oil? Like everything else BHO pushes to get passed in ahurry.....did I miss the energy independence bill?

I look forward to the gasoline going back to $-6 per gallon. Then maybe the fickle we the people will arise .....hasn't happened in 40 years.

The odds of winning the lottery are better!!!! But the price of gas will be going back up....it is inevitable...guaranteed!!!!!

I can't wait!!

BTK

[Guest]

what they bought.....did I miss the enactmnet of the bailing out of our dependence on foreign oil? Like everything else BHO pushes to get passed in ahurry.....did I miss the energy independence bill?

I look forward to the gasoline going back to $-6 per gallon. Then maybe the fickle we the people will arise .....hasn't happened in 40 years.

The odds of winning the lottery are better!!!! But the price of gas will be going back up....it is inevitable...guaranteed!!!!!

I can't wait!!

BTK

Well, BHO has it all figured out. First they raise the price of gas to over $6.00. Then he directs his new company GM (Government Motors) to design little tiny green cars that get over 70 miles a gallon. Then he gives a little tax credit if you buy one. So, 50 million people go out and purchase this car at a bargain price of $ 56,000 with a payment plan of 16% at 25 years.
Before you know it the money will be rolling in. Well, it isn't a perfect plan...but it is a beginning?

[Guest]

what they bought.....did I miss the enactmnet of the bailing out of our dependence on foreign oil? Like everything else BHO pushes to get passed in ahurry.....did I miss the energy independence bill?

I look forward to the gasoline going back to $-6 per gallon. Then maybe the fickle we the people will arise .....hasn't happened in 40 years.

The odds of winning the lottery are better!!!! But the price of gas will be going back up....it is inevitable...guaranteed!!!!!

I can't wait!!

BTK
My car (which rarely gets driven anymore) gets close to 30 MPG.

My new bike (which I ride when LindaZ doesn't come along) is averaging 60+ MPG.

My electric golf cart (most driven vehicle) get 40+ miles per full charge.

So, whatever the price of gas becomes, living in TV has become its own protection against the worst of fuel prices.

[Guest]

Me thinks all forms of energy will be affected including electrical. Cap and trade or whatever you want to label the new taxes will hit everybody. Cooling your home or heating, they will find a way to increase all forms of energy. Admit tingly, a self-contained environment that has all your needs in a nice tight radius will definitely be a blessing.
I can't wait to get down there.

[Guest]

Me thinks all forms of energy will be affected including electrical. Cap and trade or whatever you want to label the new taxes will hit everybody. Cooling your home or heating, they will find a way to increase all forms of energy. Admit tingly, a self-contained environment that has all your needs in a nice tight radius will definitely be a blessing.
I can't wait to get down there.
Come on down! We believe in protecting the environment here. There's only one license plate on a car, so less metal needs forging; none of those ugly inspection stickers in the windshield, so glue and stuff isn't needed; and fewer trees cut down to make paper to be used on state income tax forms. That's keeping things green!

[Guest]

Come on down! We believe in protecting the environment here. There's only one license plate on a car, so less metal needs forging; none of those ugly inspection stickers in the windshield, so glue and stuff isn't needed; and fewer trees cut down to make paper to be used on state income tax forms. That's keeping things green!

Sounds good. I just spent $29 bucks for the ugly sticker the other day. We are just waiting for the market to heat up a little and my For Sale sign will be right out front. Man, I can't get out of this state fast enough!!!!

[Guest]

He would only have to pay taxes in the following years on the interest he receives from his investments. How if he puts the money in coffee cans he pays no taxes.

It would be a hard call as to where to put that much money but I bet there are thousands of hungry money managers wanting a piece of that action.

Is this correct Hawk? I took out a small (10,000) IRA a few years ago. The money I used to purchase this IRA was from savings I had accumulated from paydays over a few years. Keep in mind, I had already paid taxes on these earnings. So when I recently went to cash in this IRA, I was told that I had to pay 20% tax on the accumulated roughly 13,000 that it was currently worth before withdrawing it. I asked the girl about it explaining that I've already paid taxes on the 10,000 and shouldn't I be taxed only on the roughly three thousand. The best explanantion I could gather from her was "you haven't been paying taxes on this over the past 5 or so years". After a few minutes of discussion, I knew it was useless to pursue because that's the point she kept coming back to. I'll eventually find out when I have my taxes done for "09, but I've yet to find someone who can explain to me why I should be taxed on the 13,000 instead of the accumulated interest of 3,000 in order to withdraw this money.:shrug:

[Guest]

Is this correct Hawk? I took out a small (10,000) IRA a few years ago. The money I used to purchase this IRA was from savings I had accumulated from paydays over a few years. Keep in mind, I had already paid taxes on these earnings. So when I recently went to cash in this IRA, I was told that I had to pay 20% tax on the accumulated roughly 13,000 that it was currently worth before withdrawing it. I asked the girl about it explaining that I've already paid taxes on the 10,000 and shouldn't I be taxed only on the roughly three thousand. The best explanantion I could gather from her was "you haven't been paying taxes on this over the past 5 or so years". After a few minutes of discussion, I knew it was useless to pursue because that's the point she kept coming back to. I'll eventually find out when I have my taxes done for "09, but I've yet to find someone who can explain to me why I should be taxed on the 13,000 instead of the accumulated interest of 3,000 in order to withdraw this money.:shrug:
When you get a dumb answer to a logical question, the probability that the person answering the question is wrong often is true (unless government is involved). A sad but true fact - half the people you deal with are "below average."