What is the best way to minimize taxes with a large lottery payoff?

Assume legal means.

I guess there are two scenarios to explore. One, you just want the money and party in Vegas, buy a mansion in every state, buy three cars, buy a yacht and build a swimming pool big enough to sail it in, etc.

The other is to use the money for a few things like getting out of debt, buy a house and a new car, get a really big meatball sandwich but the goal is to invest the bulk of it (real estate, stocks, bonds, venture capitalism, etc.) and live off the proceeds.

You pay most of your taxes up front, before you receive the check. I’m not sure there’s much you can do to change those amounts, you never see that money.

After you pay that income tax the money is yours. There’s no tax liability until it starts earning interest. There are any number of ways to reduce your tax burden on interest, dividends, capital gains, etc.

If it’s more than enough to live on for the rest of your life and you never place any of it in interest-bearing or other income producing account types you will never pay income taxes again.

OK but if I form a Class C corporation and employ myself, some will be taxed at the corporate rate and some (doubly taxed) at the personal rate. Plus with that much money I can do what a lot of corporations do and incorporate in Ireland. Plus what’s the story on tax havens like the Caymans? Could my Cayman Corporation claim the ticket and escape US taxes? That’s the gist of my question for the second scenario.

I’m not sure of the details, but I believe that if you move to Kansas, you can set up a personal corporation and have it pay out all profits to you, and it isn’t taxed in either the corporation or your personal return. Part of Brownback’s plan to bankrupt the state. Still have to pay federal tax, and you’d be in Kansas, so YMMV.

The additional fees, legal paperwork, and accounting services for a corp will make this impractical. The money will not be coming out of your pocket directly, and getting that money back out can become messy (its now the corps money, not yours). The IRS takes a very dim view of such corporation arrangements.

You can deduct up to 50% of you winnings if you donate them to charity. Cite. Of course you don’t have them then, but it does reduce your taxes.

If you put your money into municipal bonds, the way Mrs. Heinz-Kerry did, that should make you some money and also reduce your taxes going forward. Much better than keeping it in cash or 0% interest money market funds scattered around the country.

Wow. I did not know that. Here I thought that all money donated to charity is deductible.

So if I won some huge lotto and gave virtually 100% of the money away, I’d still have to pay federal income taxes on a lot of that money?

Wow. Now that’s a part of the tax code that I think ought to be changed.

Yet, somehow rich people who keep their money get away with paying little to no tax. But I’d have to pay the highest tax rate on money I’d be giving away. Just wow.

It’s not 50% of your winnings: It’s 50% of your AGI.

Note that you can carry forward your unused charitable deductions for up to 5 years.

But wouldn’t that be basically the same thing? If I got say $40,050,000 and wanted to give $40,000,000 of it away?

That wouldn’t help if I were doing this every year. Hmmm, looks like it was a good thing that I had as #1 on my list in this thread as “Research tax attorneys.”

Now all I have to do is win. :smiley:

Yeah, but this is true of most people who get tax refunds every year, too. You get the money deducted, then you file at tax time and get a refund or owe more. It’s possible to get a refund of part of the initial withholdings. Like anything else, it will depend on other income, losses, and deductions during the rest of the tax year.

None of this is tax advice, since I am not a tax planner or a financial planner.

If you are talking a prize in the tens of millions, you have to stop thinking in terms of your personal tax situation and more in terms of your family’s overall tax situation, assuming you have family that you want to help or share with financially, and that everyone is reasonably responsible about finances.

Of course the suggestion below won’t be attractive if you want to keep the whole pot to yourself.

And I doubt you will be able to do much to reduce the income taxes on the initial prize.

But the real tax savings will be had by getting a portion of the winnings into your descendants hands right away, rather than waiting until they inherit it down the road.

(Of course, who knows what inheritance tax laws will look like ten years down the road? You can only plan based on current law.)

Here is a very generalized, simplified example:

Assume you are a widow/widower, you have three adult children, and you win $40 million. Also assume you can grow the prize about 5% per year after taxes and spending (not likely, I know, but work with me), and you die in 14 years. Also assume that the estate tax exclusion is $5 million, and the estate tax is 40%. (close enough to the current situation.)

If you keep the prize all to yourself, it will roughly double in the 14 years before you die ($80 million). After excluding $5 million, your estate will owe 40% of $75 million, or $30 million in inheritance taxes. That leaves $50 million for your children to split, resulting in each getting $16.67 million after you die. Pretty sweet for them.

Compare this with a situation where you split the initial prize equally with your children right at the start (i.e., they received the prize as part of the initial payout, not as a gift from you which would trigger gift tax.)

(I am not going to try to determine what is the best form from a tax standpoint for them to get their share, whether it is outright, or through a trust, or as shares in a partnership. I am just pointing out a general principle here.)

Then you would have only $10 million at the start, and roughly $20 million when you die. That means your estate would only owe $6 million in estate taxes. Your kids would receive $14 million, or $4.67 million each. Plus the initial $10 million each that they would have received at the start would now theoretically be worth $20 million each.

So basically, you have avoided $24 million in future estate taxes from the standpoint of the whole family, which means each surviving branch of the family will have an extra $8 million each when you die in 14 years.

This largely ignores factors such as spending of the prize by a larger group of people, but again, one of the assumptions is that everyone is someone you want to help/share with financially and that they are responsible about money, so the use of the $10 million during the 14 years before you die is of significant value to them. Whether the actual savings is $24 million or a smaller figure, the point is you will likely reduce future taxes on your estate by letting children be co-prizewinners.

True, but your non-winnings income is in the rounding error for this exercise. I have not had the good fortune to hit the max for some deductions, but I suspect you would not be able to deduct a significant amount of your winnings outside of the charitable contributions - which is not quite a deduction, I understand.

As for carrying over, the more you carry over above 50% the less you have to generate investment returns. I doubt you could use up much of the excess contribution in five years if much above 50%. It would be interesting to model what the optimal excess contribution would be assuming various rates of return on the investment.

What are the rules for doing this kind of split. I assume it is possible since pools of players have won more than once.
And what of one of the people who will be included does not reside in a state where the lottery is run?

Seemingly, the only way to significantly reduce your tax burden would be to move to a state without an income tax. In my case, moving across the river to New Hampshire would save something like $75 million, assuming we took the $750 million one-time payout.

Well, after looking into it further, I guess it is highly possible that if you don’t have a written agreement in place before the numbers are drawn, sharing a ginormous prize with your children will very possibly trigger the gift tax, even if you set up an arrangement before collecting the winnings (but after the drawing).

So yeah, go ahead and get professional tax advice, and don’t listen to some know-nothing like me.

And if you are really serious, the time to get professional advice is BEFORE you enter the lottery or enter into any other activity that may require professional advice.

The fact is that AFTER you have won the lottery (or whatever), your options may be very limited. If you had consulted with a professional beforehand, you may have had many more (and possibly better) options.