What if you won millions of dollars in the lottery or made millions on stock options at your job? What would you do with the money? Well, the first thing you would do with the money is pay federal income taxes at ordinary income rates of up to 39.6%. You would likely lose much of the benefits of your itemized deductions and exemptions because there are reductions in the deductions for taxpayers with high incomes. So your real marginal tax rate would exceed 40%. And if you live in a state with a state income tax, you would have to pay state income tax as well. If you win the lottery, perhaps you would choose the deferred payment option. You think after receiving payments for over a year, that you could sell the deferred payments and pay taxes only at the rate for net capital gains, which is currently a maximum of 20%. That will not work. Although the Internal Revenue Code does not exclude deferred lottery winning from being a capital asset (the law actually defines capital assets by saying what they are NOT--strange but true), the courts have ruled against taxpayers in similar cases. So what could you do? There is a certain kind of investment that you could make that would allow you to deduct about 90% of your investment. There are no guarantees, but if you invest prudently (you have to do so because there are scams out there), you could make a good return on your investment. You would even be entitled to an extra tax deduction that would cost you nothing. But what if you got so excited about your sudden wealth and were scared to do anything with your money? Well, just wait two years to make this investment. If you invest enough, you could eliminate all your federal tax liability for that year and carry a loss back two years and get some or all of the money back that you paid in federal income taxes on your lottery winnings (or other large amount of irregular income). Sadly, many lottery winners do not engage in tax planning or invest prudently. If you are so fortunate to have a sudden increase in income, you have to be smarter than that. I do not sell investments, but I can refer you to people who do.
Posted on: Thu, 06 Jun 2013 16:08:34 +0000
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