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Author: LMSM One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: RE:Lottery winnings Date: 8/11/1999 10:14 AM
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As I wrote at the last message board, I know that Fools aren't supposed to play the lottery, but we did and won. The questions now are, where can we go to sell the annuity that will give us competitive rates and one accountant told us that if we hold it for a year and then sell it we would be eligible to file our taxes under the long term capital gains rate (20%) vs. the regular income tax rate (at that point it would be 39.6%, BIG difference.) Is the first guy we talked to doing "creative" accounting because if that's the case, he can keep his ideas. I won't screw around with the government but I don't want to give them more then they are entitled to either. Please help!!!
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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18140 of 121061
Subject: Re: RE:Lottery winnings Date: 8/12/1999 11:05 PM
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LMSM writes:

As I wrote at the last message board, I know that Fools aren't supposed to play the lottery, but we did and won. The questions now are, where can we go to sell the annuity that will give us competitive rates and one accountant told us that if we hold it for a year and then sell it we would be eligible to file our taxes under the long term capital gains rate (20%) vs. the regular income tax rate (at that point it would be 39.6%, BIG difference.) Is the first guy we talked to doing "creative" accounting because if that's the case, he can keep his ideas. I won't screw around with the government but I don't want to give them more then they are entitled to either. Please help!!!

I reply:

Welcome to the board! I note that you haven't yet received an answer to your question. I can't help you there -- your question is beyond my knowledge base -- but don't despair! If no one else answers, keep an eye out for the return of TMFTaxes. He ALWAYS answers questions. My normal sign-off (Good luck!) seems kind of wasted on you, so I'll try congratulations! --Bob

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Author: hghcpa Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18142 of 121061
Subject: Re: RE:Lottery winnings Date: 8/13/1999 9:03 AM
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As I wrote at the last message board, I know that Fools aren't supposed to play the lottery, but we did and won. The questions now are, where can we go to sell the annuity that will give us competitive rates and one accountant told us that if we hold it for a year and then sell it we would be eligible to file our taxes under the long term capital gains rate (20%) vs. the regular income tax rate (at that point it would be 39.6%, BIG difference.) Is the first guy we talked to doing "creative" accounting because if that's the case, he can keep his ideas. I won't screw around with the government but I don't want to give them more then they are entitled to either. Please help!!!
==============
I'll try to give this a shot but am sorta confused and need some more detail.

What does winning a lottery have to do with cashing an annuity?

If they are two unrelated transactions I can tell you this much.

Winning a lottery = taxable ordinary income which can be offset by the cost of the lottery ticket.

Cashing an annuity - taxable ordinary income and possibly subject to premature withdrawal penalties depending on your age and other factors.

I am unaware of any situation where an annuity would receive capital gains treatment.

Annuities can be rolled over to other annnuities in certain situations - seek professional help from the one who sold you the first annuity.

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Author: LMSM One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18143 of 121061
Subject: Re: RE:Lottery winnings Date: 8/13/1999 10:34 AM
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Hi!! Thanks so much for the responses!! To answer hghcpa: We did not get the lump sum, instead the state gives you an annuity that in twenty five years would add up to the total prize amount. We are still working full time and are contributing the max to our 401K and 403B so we are certainly not crazy enough to think we are set for life on the winnings alone. We are going to only sell about 15 years worth of it in order that we can invest it ourselves and make a better return than the very low payments we will be getting otherwise. So even if we screwed up investing it (we won't though we are learning to be Foolish!) we still will have 9 more payments coming in 16 years to fall back on. We had gone to a CPA and he is the one that had mentioned that if we waited a year and then sell it we would only have to pay the 20%. He mentioned something about extraordinary income (whatever that means) I'm not sure where he got the back up for this, it's not considered property right? We consulted another CPA yesterday and he is not sure this sounds right either. (tax code 2112 I think he mentioned) Basically (I guess) it is considered income whether we got it initially as a lump sum or if the money is coming in annually from an annuity.... Oh my goodness, this whole thing is too confusing... We are going with the 2nd CPA he said he would do some research to see what he finds. Sorry to be so chatty but it's hard to explain all of this in less words. Thanks so much!!!

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Author: hghcpa Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18144 of 121061
Subject: Re: RE:Lottery winnings Date: 8/13/1999 11:19 AM
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Duhhhhh!

Seems like I could put two and two together and get four doesnt it.

Lottery winnings paid out over 20 years = annuity.

Anyway,

Without doing research I would hazard this opinion.

This form of annuity payment - even if it can be sold at its net present value today would not qualify for longterm capital gain treatment.

My reasoning is that if the entire payment were to be paid to you one year and one day after you won the prize - would that mean it would qualify for LTCG treatment?

I say no.

Each payment would be taxed as ordinary income. In fact i would guess that should you keep the contract the payor would send you a 1099-misc each year for the amount of the annual payment.

HTH

Pete


PS - Lucky dude/dudette!!


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Author: BobStL One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18157 of 121061
Subject: Re: RE:Lottery winnings Date: 8/13/1999 9:08 PM
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Lottery Winnings are an "annuity" if you are receiving the money over several years. The IRS looks on it as an annuity when you die and any balance of the winnings is considered "income" at that time. It sounds like it's too late for planning, you won and accepted the yearly payment plan in your own name/names. You're correct in not playing games with the IRS over this, you will receive a 1099G from the State. You should know by now though if there was Federal and/or State withholding on your winnings. The problem that arises is next year. Let's assume you make quarterly payments for the balance of this year - Next year you will have to start your quarterly payments probably prior to receiving your year 2000 Winnings Payment. Plan - plan - plan, If your second CPA has not come up with your year 2000 tax plans, go to a professional tax planner. Not all CPA's stay
current in the tax field.
I'd say Good Luck but it seems redundant :)

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Author: gmc123 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18193 of 121061
Subject: Re: RE:Lottery winnings Date: 8/16/1999 12:50 PM
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Each payment would be taxed as ordinary income. In fact i would guess that should you keep the contract the payor would send you a 1099-misc each year for the amount of the annual payment.

Actually, I think lottery prizes are on a 1099G.

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