In our family of 5, the agreed rule is if anyone wins the Megabucks or any large lottery, the winner gets 50% and the rest of the family splits 50%. Does that change the taxation structure, i.e. are the taxes reduced?
We received several questions based on the QoD of 4/13/08, concerning how the Megabucks jackpot is paid out. Here are the answers to two of them.
The answer to the first question’s first question is no, it doesn’t change the taxation structure. Nothing -- except Congress, on occasion, and always for the worse -- changes the tax structure.
However, the overall amount of taxes might be reduced, depending on a number of variables.
Let’s take a Megabucks jackpot of $10 million (it’s unlikely the top Megabucks prize would be hit a minute or two after the machines are reset from the previous jackpot, but this is a hypothetical situation).
You hit the jackpot, so, as we saw in the previous QoD, you get a check for $400,000 immediately, one-twenty-fifth of the amount. And again, let’s assume the lump-sum cash payment is 60% of the remainder, which would be $5.76 million.
(On a side note, if you haven’t already, it’d be wise to determine with your family if the initial $400,000 is factored into the split or not. If it is, you’ll receive another $2.88 million and your family will split $3.28 million. If not, you’ll receive $3.08 million and your family will split the other $3.08 million.)
Anyway, for argument’s sake, say the family splits $3.8 mil 100 different ways. This is done via the use of Form 575 -- Statement by Person(s) Receiving Gambling Winnings. (See "Gambling Groups" in our tax book, Tax Help for Gamblers, starting on page 38, with a sample form in Appendix A3); lottery officials use this form all the time, so that the lottery issues the various checks, rather than the winners. (Tax Help for Gamblers is available at this link, both in printed and e-book versions.)
Anyway, using our first example, 100 members of your family would receive checks for $32,800 apiece. You’re now only liable for taxes owed on your half or so of the jackpot and the other recipients are on the hook for the rest.
Now, since the amount has been sliced and diced into so many smaller pieces, which will be subject to a lower tax rate and a variety of deductions and exemptions, the amount of taxes paid on each slice of the pie would certainly add up to much less than it would on the full amount.
Even if the remaining $3.08 million is split only five ways, the total taxes could conceivably still be less. Perhaps one of the family members owns an expensive house with a huge interest deduction. Perhaps another has sustained a major gambling loss that year and can justify a write-off against the jackpot of six figures. Perhaps another has substantial medical expenses. Etc.
So yes, it’s quite possible that the total taxes on the jackpot can be reduced if it’s split among family members.
As for the second question about taxes paid on the installments, the answer is no. Taxes aren’t due until the money is actually received by the taxpayer. Using our example of $10 million, even the government’s not so unfair as to demand roughly $4 million in taxes when you’ve only been paid $400,000 and won’t even see $4 million for 10 years. If that were the case, everyone who hit a jackpot and took it in installments would be opting for immediate bankruptcy.
