So, you just won a significant amount of money from the lottery or at a casino. First of all, congratulations! That’s a pretty great problem to have. Before you start buying cars, paying off the house, booking vacations, or handing checks to family members, though, there’s one thing we strongly recommend doing first: figure out the taxes.
Lottery and casino winnings are generally considered taxable income by the IRS. Depending on the size and type of your winnings, taxes may have already been withheld before you receive the money, but don’t make the mistake of assuming that means your tax bill has been completely taken care of. For certain gambling winnings, federal taxes are withheld at 24%. That sounds substantial, but if you’ve won a large enough amount, your actual federal tax liability could be higher once all of your income for the year is taken into account.
That’s why we recommend treating a significant win as temporarily untouchable until you know what you’re really dealing with. If you won $1 million, for example, don’t immediately start making plans for how you’re going to spend $1 million. First, determine how much could go toward federal taxes, whether your state will want a piece of it, how much has already been withheld, and whether you should make an estimated tax payment. Once those numbers are clear, you’ll have a much better idea of how much money you actually have available to enjoy.
If your winnings came from a major lottery jackpot, you may have another big decision to make before you ever receive the money. Depending on the lottery, you could have a choice between taking a lump sum or receiving payments over a number of years. There can be very different tax, investment, and estate-planning considerations depending on which direction you choose, so it’s worth getting professional advice before making an election you may not be able to change later.
We also recommend holding off on giving away large amounts of money right away. It’s completely understandable that your first instinct might be to pay off Mom and Dad’s house, give your kids money, help your siblings, or take care of the people who have been there for you. Just talk to your tax professional before doing it. Large gifts can create additional tax reporting and estate-planning considerations, and there may be a smarter way to accomplish exactly what you want to accomplish.
If you bought a winning lottery ticket with other people, that’s another situation you want to address before simply claiming all of the money yourself and distributing everyone’s share afterward. The IRS has procedures for situations involving multiple winners, and getting the ownership and reporting correct from the beginning can save everyone a lot of unnecessary headaches later.
Casino winners should also start keeping records immediately. Save your W-2Gs, casino statements, wagering records, receipts, tickets, and anything else documenting your gambling activity. Gambling losses may be relevant when your tax return is prepared, but documentation is extremely important. Trying to recreate an entire year of gambling activity at tax time is much harder than keeping good records as you go.
The best thing you can do immediately after a major win is actually pretty boring: don’t rush into anything. Don’t assume the amount on the check is the amount you have available to spend, and don’t immediately start making huge purchases or transferring large amounts of money to friends and family. Secure your winning ticket or paperwork, keep copies of everything, put the money somewhere safe, and get the tax side figured out before making any major financial decisions.
Winning a significant amount of money should be exciting, but finding out months later that you spent money that should have been set aside for taxes definitely isn’t. If you’ve recently had a significant lottery, casino, sports betting, or other gambling win, give TaxPointe a call before you start making major moves with the money. We can look at what you won, what has already been withheld, what you may ultimately owe, and whether you should make estimated tax payments now. Then you can get back to the fun part: deciding what you’re going to do with the money you actually get to keep.
*This article is for general informational purposes and should not be considered individualized tax, legal, or financial advice.*