# Tax question: winning the lottery **URL:** \ **Category:** Factual Questions\ **Created:** [August 9, 2012, 8:30pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999 "2012-08-09T20:30:22Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![kaylasdad99](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kaylasdad99/32/3398_2.png) [@kaylasdad99](https://boards.straightdope.com/u/kaylasdad99)\ **Post date:** [August 9, 2012, 8:30pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/1 "2012-08-09T20:30:22Z")
Okay, according to my latest check stub, my earnings for the year thus far come to just over $40K. This Friday, I am scheduled to win $16.5M (I figured out that just calling “dibs” isn’t sufficient; I also have to mail the numbers I picked to the place where they do the drawing, so they know what numbers to pull. :smack: I can’t BELIEVE it took me this long to figure that out. But I digress) in the Mega-Millions lottery. That represents 75% of the $22M cash value of the prize (25% Federal income tax). AIUI, once the drawing takes place, I have six months to claim the prize. It occurs to me that adding $22M to the money I’m pulling down at my current job is going to make filing a 1040A for 2012 a real PITA. So I’m wondering if I would benefit by delaying the claim date until January 2. Actual question: Does the date of counting the lottery winnings as taxable income occur on the date of the drawing, or on the date that the winner claims the prize? Need answer fast. Well, sometime in the next six months, anyway. ---
**Author:** ![Mister\_Owl](https://avatars.discourse-cdn.com/v4/letter/m/919ad9/32.png) [@Mister\_Owl](https://boards.straightdope.com/u/Mister_Owl)\ **Post date:** [August 9, 2012, 9:24pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/2 "2012-08-09T21:24:46Z")
With that kind of money you should hire an accountant and tax attorney. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [August 9, 2012, 9:39pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/3 "2012-08-09T21:39:17Z")
$16.5M at, say, a measly 2% interest, is $330,000. For 6 months, that’s $165,000. (less income tax on interest earned.) IIRC, the lottery commission does not add the accumulated interest to your jackpot if you delay collecting it - I’ve never heard of that. So if $165,000 is chump change compared to what you earn, then by all means take your time. You can have your butler call your personal assistant and have him cash the ticket in January. ---
**Author:** ![FasterThanMeerkats](https://avatars.discourse-cdn.com/v4/letter/f/278dde/32.png) [@FasterThanMeerkats](https://boards.straightdope.com/u/FasterThanMeerkats)\ **Post date:** [August 9, 2012, 9:43pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/4 "2012-08-09T21:43:26Z")
IANAL, my guess is if it’s US it’s neither, it’s when you get 1099’d by the lotto company, which should be when they cut you a check. Personal income in the U.S. is mainly counted on a cash basis (as I generally recall from tax classes many years ago) because “ability to pay” is considered. Having to pay taxes before you collect the cash would create hassles in many situations, not just lotteries. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [August 9, 2012, 10:09pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/5 "2012-08-09T22:09:17Z")
Federal income tax will be 35%. CA will want 9% itself. So you’re underestimating taxes by almost half. 🙂 I’m pretty sure the earnings will be taxed in the year that you claim them and are paid, though, so you can at least put the taxes off by waiting a while. ---
**Author:** ![thelurkinghorror](https://avatars.discourse-cdn.com/v4/letter/t/7c8e57/32.png) [@thelurkinghorror](https://boards.straightdope.com/u/thelurkinghorror)\ **Post date:** [August 9, 2012, 10:17pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/6 "2012-08-09T22:17:27Z")
1040A would not be used, you’d get an “upgrade” to 1040. > [@FasterThanMeerkats](#): > > IANAL, my guess is if it’s US it’s neither, it’s when you get 1099’d by the lotto company, which should be when they cut you a check. > > Personal income in the U.S. is mainly counted on a cash basis (as I generally recall from tax classes many years ago) because “ability to pay” is considered. Having to pay taxes before you collect the cash would create hassles in many situations, not just lotteries. That sounds pretty accurate. E.g. “neither,” but closer to when you get the money. Although some businesses might work differently, an individual worker would not care when they bill someone but when it gets paid. > [@dracoi](#): > > Federal income tax will be 35%. CA will want 9% itself. So you’re underestimating taxes by almost half. 🙂 > > I’m pretty sure the earnings will be taxed in the year that you claim them and are paid, though, so you can at least put the taxes off by waiting a while. Isn’t CA 10.3%? 9.3% + 1% “Millionaire Tax.” ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [August 9, 2012, 10:18pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/7 "2012-08-09T22:18:44Z")
> [@FasterThanMeerkats](#): > > IANAL, my guess is if it’s US it’s neither, it’s when you get 1099’d by the lotto company, which should be when they cut you a check. This is correct, and you can’t just wait to deposit the check until next year. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [August 9, 2012, 10:44pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/8 "2012-08-09T22:44:13Z")
> [@thelurkinghorror](#): > > Isn’t CA 10.3%? 9.3% + 1% “Millionaire Tax.” That’s true. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [August 9, 2012, 11:20pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/9 "2012-08-09T23:20:58Z")
> [@thelurkinghorror](#): > > Isn’t CA 10.3%? 9.3% + 1% “Millionaire Tax.” California does not tax California state lottery prizes. However, if a California resident won an out-of-state lottery, that tax would apply. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [August 9, 2012, 11:35pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/10 "2012-08-09T23:35:14Z")
Most people wait until they’ve won the prize and then go out and hire a lawyer and a tax adviser. At that point, all that the pros can do is damage control. They can ask questions like “Well, did your grandmother give you a dollar EVERY week to play the Lotto? Did you have an agreement about how you would split the prize? Was the agreement in writing? Did anyone witness you talking with your grandmother about your lotto agreement?” and so on. If you’re serious about playing the lotto (and especially if you are running some kind of pool where a hundred people chip in every week), a lawyer or tax pro can do you the most good if you talk to them BEFORE you win. They can show you how to set up a partnership or a trust that will accomplish whatever you want to accomplish while minimizing taxes. And it will increase the odds that your arrangement will survive legal scrutiny by the IRS and lawsuits from that guy in the office who says he was out sick on lotto collection day but should still get a piece of the jackpot. ---
**Author:** ![kaylasdad99](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kaylasdad99/32/3398_2.png) [@kaylasdad99](https://boards.straightdope.com/u/kaylasdad99)\ **Post date:** [August 9, 2012, 11:57pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/11 "2012-08-09T23:57:04Z")
> [@dracoi](#): > > Federal income tax will be 35%. CA will want 9% itself. So you’re underestimating taxes by almost half. 🙂 [From the Mega Millions Official Home “Where To Play” page for California:](http://www.megamillions.com/whereto/states_ca.asp) > [@](#): > > Tax Information > > No state tax on lottery winnings > 25% federal tax As for the rest of it, I have formulated a disbursement plan that will see me actually investing $4.5M @ 4% p.a. in tax-free municipal bonds. That’s the kind of thing I _will_ be discussing with an accountant. Right now, my concern is with whether I can free-file a 1040A on line next February. ---
**Author:** ![just\_some\_guy5](https://avatars.discourse-cdn.com/v4/letter/j/5daacb/32.png) [@just\_some\_guy5](https://boards.straightdope.com/u/just_some_guy5)\ **Post date:** [August 10, 2012, 12:05am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/12 "2012-08-10T00:05:28Z")
> [@Alley\_Dweller](#): > > California does not tax California state lottery prizes. That’s sound tax policy if I ever heard it. Were they concerned that taxing the state lottery might disincentivize all those number-crunchers out there buying tickets? ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [August 10, 2012, 12:37am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/13 "2012-08-10T00:37:44Z")
> [@kaylasdad99](#): > > [From the Mega Millions Official Home “Where To Play” page for California:](http://www.megamillions.com/whereto/states_ca.asp)As for the rest of it, I have formulated a disbursement plan that will see me actually investing $4.5M @ 4% p.a. in tax-free municipal bonds. That’s the kind of thing I _will_ be discussing with an accountant. > > Right now, my concern is with whether I can free-file a 1040A on line next February. 25% is the amount withheld. That is not your total tax obligation. That is not determined until you file your Form 1040 at the end of the year, at which time you may have to pay more or get a refund if the withholding was too much. Think of the 25% as a “security deposit” that you have to put up against payment of taxes. At the end of the year, when your actual taxes are calculated, the “security deposit” will be applied towards what you really owe. It’s the same as the withholding that gets taken out of your salary. It’s only an estimate of what you might really owe. If you are like most people, at the end of the year, you get a refund. That’s because the estimate was too high. You could fill out your W-4 form more accurately so that less tax would be withheld each week, but most people don’t. ---
**Author:** ![gazpacho](https://avatars.discourse-cdn.com/v4/letter/g/6f9a4e/32.png) [@gazpacho](https://boards.straightdope.com/u/gazpacho)\ **Post date:** [August 10, 2012, 12:47am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/14 "2012-08-10T00:47:02Z")
> [@Alley\_Dweller](#): > > 25% is the amount withheld. That is not your total tax obligation. That is not determined until you file your Form 1040 at the end of the year, at which time you may have to pay more or get a refund if the withholding was too much. > > Think of the 25% as a “security deposit” that you have to put up against payment of taxes. At the end of the year, when your actual taxes are calculated, the “security deposit” will be applied towards what you really owe. > > It’s the same as the withholding that gets taken out of your salary. It’s only an estimate of what you might really owe. If you are like most people, at the end of the year, you get a refund. That’s because the estimate was too high. You could fill out your W-4 form more accurately so that less tax would be withheld each week, but most people don’t. Back in the high flying tech days of the late 90s there were a lot of people who cashed their stock options and found out at in April that the 28% withholding was not enough. ---
**Author:** ![greenslime1951](https://avatars.discourse-cdn.com/v4/letter/g/e9bcb4/32.png) [@greenslime1951](https://boards.straightdope.com/u/greenslime1951)\ **Post date:** [August 10, 2012, 12:55am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/15 "2012-08-10T00:55:35Z")
Many lotteries have a fairly short time window for winners to claim their prizes, and then the unclaimed money fattens the next jackpot. I do remember reading of one big winner who delayed claiming his winnings until after he had divorced his wife (he later settled with her out of court). What I would be worried about in the interim between winning and claiming would be safeguarding that little slip of paper worth over $22 million. Do I build it a steel fireproof safe and stick it in the bomb shelter in the basement? Because I wouldn’t be comfortable with less. Plus, let’s say that on the day I do claim the winnings, I find out I have six months to live. Wouldn’t I feel silly for having waited six months to present the winning ticket! ---
**Author:** ![eschereal](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/eschereal/32/18939_2.png) [@eschereal](https://boards.straightdope.com/u/eschereal)\ **Post date:** [August 10, 2012, 1:49am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/16 "2012-08-10T01:49:02Z")
Lottery winnings are considered “unearned income”, upon which you can expect a surtax, probably on the order of an additional 6% (not all unearned income is treated equally). It might possibly be to your advantage to try income averaging, for which you would have, IIRC, a three-year window into which to divide your windfall. At 16.5M, though, the advantage seems pretty insignificant. The 25% number does not sound right to me, though, I have always heard of a 50% initial withholding. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [August 10, 2012, 2:19am UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/17 "2012-08-10T02:19:29Z")
> [@For You](#): > > Lottery winnings are considered “unearned income”, They are “Miscellaneous income” (line 21 on the 2011 1040). > [@](#): > > upon which you can expect a surtax, probably on the order of an additional 6% (not all unearned income is treated equally). There is no such surtax (yet). In 2013 there will be a 3.8% Medicare surtax. > [@](#): > > It might possibly be to your advantage to try income averaging, for which you would have, IIRC, a three-year window into which to divide your windfall. At 16.5M, though, the advantage seems pretty insignificant. Income averaging is only possible in very limited cases, e.g. if you are a farmer or commercial fisherman. > [@](#): > > The 25% number does not sound right to me, though, I have always heard of a 50% initial withholding. 25% may not sound right, but it is. ---
**Author:** ![What\_the](https://avatars.discourse-cdn.com/v4/letter/w/f4b2a3/32.png) [@What\_the](https://boards.straightdope.com/u/What_the)\ **Post date:** [August 10, 2012, 1:09pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/18 "2012-08-10T13:09:36Z")
> [@For You](#): > > Lottery winnings are considered “unearned income”, upon which you can expect a surtax, probably on the order of an additional 6% (not all unearned income is treated equally). > > It might possibly be to your advantage to try income averaging, for which you would have, IIRC, a three-year window into which to divide your windfall. At 16.5M, though, the advantage seems pretty insignificant. > > The 25% number does not sound right to me, though, I have always heard of a 50% initial withholding. You must have a pretty big ass to have pulled that much out of it. Seriously, how can you post something as inacurate as this?? I’ll probably be reprimanded for being nasty when you should be put on GQ probation. ---
**Author:** ![Gus\_Gusterson](https://avatars.discourse-cdn.com/v4/letter/g/85f322/32.png) [@Gus\_Gusterson](https://boards.straightdope.com/u/Gus_Gusterson)\ **Post date:** [August 10, 2012, 1:55pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/19 "2012-08-10T13:55:18Z")
Nobody has mentioned “constructive receipt”. I don’t know the current position of the courts on this issue, but there have been cases where the IRS took the position that the winner has constructive receipt of the winnings on the date of the drawing and owes taxes as of that date. The idea of constructive receipt is that you can’t avoid taxation by pretending that you don’t have access to the money you’re being taxed on. For example, not cashing your paycheck doesn’t allow you to avoid paying taxes on those earnings. The argument has been made that not cashing in the lottery ticket is similar - once you have the winning ticket you are guaranteed the money so you are in constructive receipt of the money and owe taxes in the year in which you won even if you wait until the next year to collect. Again, I don’t know the current position of the courts on this issue but it is something that lottery winners have to be aware of. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [August 10, 2012, 4:29pm UTC](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999/20 "2012-08-10T16:29:56Z")
> [@Gus\_Gusterson](#): > > Nobody has mentioned “constructive receipt”. I don’t know the current position of the courts on this issue, but there have been cases where the IRS took the position that the winner has constructive receipt of the winnings on the date of the drawing and owes taxes as of that date. The idea of constructive receipt is that you can’t avoid taxation by pretending that you don’t have access to the money you’re being taxed on. For example, not cashing your paycheck doesn’t allow you to avoid paying taxes on those earnings. The argument has been made that not cashing in the lottery ticket is similar - once you have the winning ticket you are guaranteed the money so you are in constructive receipt of the money and owe taxes in the year in which you won even if you wait until the next year to collect. Again, I don’t know the current position of the courts on this issue but it is something that lottery winners have to be aware of. So if you move to a different state where taxes are much less, before claiming the money, it may be a waste of time? (After all, it’s not just the winnings, its tax on the interest/ earnings going forward. ) [Next page](https://boards.straightdope.com/t/tax-question-winning-the-lottery/630999.md?page=2)