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You Won! Congratulations — Now Pay Your Taxes

The IRS is coming for a piece of that windfall.
March 22, 2017
Income Taxes, Property Taxes, Taxes
You Won Pay Your Taxes
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March Madness is one of the biggest gambling events of the year. Americans bet $9.2 billion last year on the tournament through office pools, offshore sites and bookmakers, according to the American Gaming Association. But few people realize that if they get lucky, the IRS gets lucky, too. That’s because many kinds of financial windfalls may be taxable.

Here’s a head-to-head look at how lucky winners — of the office brackets pool, but also winners of other sorts — can make tax season a slam dunk, according to the pros.

Matchup: Office brackets pool vs. the IRS

Winner: the IRS

If your bracket doesn’t bust and you end up winning your pool, be sure to think about your tax return while you’re counting your winnings and bragging about your prowess for picking Cinderellas, says Jeff Fosselman, a CPA and certified financial planner at Relative Value Partners in Northbrook, Illinois.

“You are, according to the letter of the law, obligated to report that as income,” he says.

» MORE: Find the best tax software

Matchup: Overachievers vs. Uncle Sam

Winner: Overachievers

The dollar values of small rewards from the boss, such as a turkey during the holidays or a free dinner for working late, are usually considered “de minimis”— Latin for, essentially, “concerning trifles” — and probably won’t show up on your W-2 as compensation, says Cynthia Kula, CPA, certified financial planner and director of tax at Walthall CPAs in Cleveland.

But be sure to ask about the tax consequences of those free cruises, weeklong trips or other big noncash awards the boss might dole out for beating performance goals, Fosselman says. They’re typically considered taxable at their fair market value.

“Generally, with those sorts of awards there’s no opportunity for withholding, so when you go to pay your taxes at the end of the year, your W-2 is going to have a lot more income and thus you’re going to be subject to a lot more tax and might not have enough withholding to cover that. You could have a substantial tax bill,” he says.

It’s OK to say “no thanks” if you’re not thrilled enough about an award to want to pay the extra taxes, Fosselman adds.

“Whether you enjoy it — even whether you go [on the trip] or not — if you have the award and you have the opportunity to go, you’re going to have to pay the tax bill on it,” he says.

» MORE: Calculate your tax burden with our income tax calculator


 

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Matchup: Lottery winners vs. the taxman

Winner: Lottery winners — if they play their cards right

If you’ve won the lottery, lock down the ticket before worrying about the tax bill, Fosselman says.

“You make the photocopy of it, you stick it in the safe deposit box, you lay low, hire the team of advisors and come up with a plan before you claim it. And hope you’re in one of the few states that allow you to collect it anonymously,” he says.

Deciding whether to take the lump sum or an annuity option is often a dilemma. For Kula, who says she once advised a group of employees who won a jackpot of around $23 million, lump sum is usually the way to go for tax purposes.

“There is planning to be done, and I think that overall it’s better to bite the bullet — pay [the taxes upfront] — instead of spreading it out so you’re paying that maximum in taxes forever,” she says.

But Fosselman warns: Depending on the size of the jackpot, the amount automatically withheld for taxes when you claim your winnings might end up being too low, which means winners could have a second tax bill coming. The annuity option could be better from a tax perspective, he says, if the payments are small enough to keep you in a lower tax bracket than you’d be in if you took the lump sum.


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