Question of the Day - 16 February 2021

I vote for S Lake Tahoe. Beautiful scenery and find some of the best breakfast houses there (great for hangovers). Two near each other are Bert’s Cafe and Ernie’s Coffee Shop. Unfortunately I didn’t find Kermit’s restaurant.  :D

Basically assuming he is filing as a single person.

If he took a lump sum payment of any amount over $518,401.00 has to pay 37% in Federal Income Tax for 2020!

If he took 30 annual payments on the $15,500,000.00 the annual payout would be $516,666.67 and would have to pay 35% of that amount in Federal Income Tax for 2020 and 2021 but future tax payment may vary or stay the same.

There is no current tax table for a 27$ tax rate.

Casino jackpots are often subject to 22% withholding.  It used to be 25% but was decreased a couple of years ago for the Tax Cuts and Jobs Act.

The withholding doesn't always cover what you eventually owe.

The Megabucks jackpot is an annuity. If you take the lump sum payment, you are opting to be paid the "present value" of that annuity--what the promise of future money is worth to you now. That is significantly affected by interest rates; the lower they are, the higher the present value of an annuity. Megabucks winners can get a much larger lump sum payment than usual, because interest rates are historically low.

First, even though they withhold 27% federal tax on the jackpot, the winner, actual federal tax rate is going to be 37%.  A very small amount of the jackpot will be taxed at less than 37% but most of it will be taxed at 37%, so even after they withhold the 27%, the winner will have to set aside roughly another 10% of the gross which will be due when the winner files their tax return for the year.  

Secondly, even though Nevada has no state tax, the winner is subject to state tax in their resident state.  Alaska also has no state tax, so that’s moot, but a winner from California or New York City would owe an additional 12 or 13% in state and city taxes.  

I would love to owe that much tax by winning a big jackpot.  I wouldn't even begrudge Oklahoma their 5%

You've mentioned the many things that affect the payout, but some questions remain. For tax purposes, since he won in December, if the 1st payment doesn't happen until January, does he have all year to have a tax specialist help him mitigate the expenses or does he need to have taxes considered in the year the reels stopped? Charitable contributions, keeping count of losses, tax-deductible investments, etc. Also, does IGT change the way the jackpot increases based on the prevailing interest rates? Also, your example shows that the money needed to pay out was about 82% of the shown jackpot. At 5% (which was not unreasonable that long ago), they only needed about 60% to pay off. In other words, could it either take a bigger chunk of each bet to increase the jackpot, or more coins in to increase it?

State lotteries seem to pay out in the neighborhood of 50-60% for lump sum payouts after deducting taxes.  Their jackpots are paid out in lump sum or annuities also.  I would assume the payout ratios are similar

At 2020 tax rates, assuming this is all extra income and therefore not affected by any deductions, and assuming he is filing as a single taxpayer, then on $12,708,100 he would pay $4,658,736 in Federal Income Taxes, or 36.7%, which is pretty much the full 37% as mentioned above.  Thus, it would behoove him to request extra withholding or to pay estimated additional quarterly taxes of 10% to avoid any possible penalties.

Interestingly, if he instead chose 30 equal annual payments of $516,370, he would not even reach the 37% tax bracket.  At 2020 rates he would owe $148,547 in FIT, or 28.7%.  Thus the 27% withholding would be adequate.

Given that most people could live very, very well on over a half million dollars a year, and given that annual payments would reduce the chance of squandering the prize as has sadly happened to many lottery winners, then as long as the full 30 years are paid out to his heirs if he dies before then, the annual payment may make sense.

Would the winner have to decide right then or would they have a few days to figure it out
Next how would you even know who to trust to turn to for advice
Maybe someday I will have these problems so I guess I should plan  LOL

Regular Gambling Withholding for Certain Games
You may be required to withhold 24% of gambling winnings for federal income tax. This is referred to as regular gambling withholding. Withhold at the 24% rate if the winnings minus the wager are more than $5,000 and are from:

Sweepstakes; Wagering pools; Lotteries; Wagering transactions in a parimutuel pool with respect to horse races, dog races, or jai alai, if the winnings are at least 300 times the amount wagered; or Other wagering transactions, if the winnings are at least 300 times the amount wagered. 

Regular gambling withholding doesn't apply to winnings from bingo, keno, or slot machines, nor does it apply to winnings from other wagering transactions if the winnings are $5,000 or less. However, see Backup Withholding, later.

Regular gambling withholding is figured on the total amount of gross proceeds (the amount of winnings minus the amount wagered), not merely on the amount in excess of $5,000.

1.) The correct percent is 24%
2.) Withholding is not mandated on slot machine winnings.

I asked the second part of today's question. You said he probably received it as a lump sum, after taxes, but wanted to know if he could get it as CURRENCY rather than a check!! Ignore problems with bulk/weight.

My tax guy said basically allow the 37% (or whatever) withholding by the casino at the time (do we have a choice?).  Later get with your finance peeps, take time to work out the rest depending on your situation, like age, how much longer are ya likely to live?  Annuity over how long?  Charitable giving etc., those things to reduce tax liability.  I have no idea what I'm talking about, just what I recall him saying. 

I don't know how IGT transfers large amounts of money to individual jackpot winners, but NFW is IGT sending its employees around with millions of cash on hand to pay jackpot winners. It's a huge security risk, not to mention cumbersome physically -- $9M in $100 bills weighs almost 200 pounds. I've got to imagine it's either by check or wire deposit.

So what does IGT net from the megabucks machines network?