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Finding the Rock in the Lottery Jackpot

March 06, 1986|DON G. CAMPBELL | Times Staff Writer

Question: Now that we have the California State Lottery, a question occurred to me that I think many other of your readers may be wondering about.

First, are lottery winners subject to state and federal income tax? If so, how much?

Persons who are receiving Social Security benefits are allowed to earn a certain amount of money without losing any of their Social Security payments. Are lottery winnings considered to be money earned ? If a person receiving Social Security should be lucky enough to be the winner of a sizable amount, such as $10,000 or $25,000 or more, would winnings like this affect his Social Security payments and, if so, to what degree?

Bear in mind: This is all hypothetical. Unfortunately, neither question is a real source of worry for me.--H.L.

Answer: You know what they say: Death and taxes. You can bet your last enchilada that lottery winnings are taxable--at least as far as Uncle Sam is concerned. The bright spot here is that lottery winnings are exempt from California taxes.

However, Robert Giannangeli, a spokesman for the Internal Revenue Service, hastens to add that the California exemption applies only to the California lottery. If you wander afield and win Downtown Tucson in the Arizona lottery (or New York, or Michigan or Massachusetts), then this is fully taxable by the state. A little freebie for the home folks.

No such charity is extended by the IRS, however. Every dime you win in the lottery is considered taxable income; although, if push came to shove, minor winnings would be a little difficult for Uncle Sam to establish because all of those losing tickets you've bought are, technically (and if you can prove you bought them), deductible against your winnings. It's an argument, although not a compelling one, for saving all of your losers.

The actual reporting--by the state to the IRS--of winnings starts at about $500, but withholding itself (20%), doesn't begin until the $5,000 level, Giannangeli continues. As the lucky winner of, say, $50,000, you would receive $40,000 in cash and your copy of Form W2G ("Statement for Recipients of Certain Gambling Winnings"), which you would attach to your next Form 1040 for proper credit.

And, yes, you've guessed it: For certain high rollers, that 20% withholding could still leave you stuck for additional federal taxes over and above the amount withheld.

As long as we're fantasizing here, we might as well take the hypothetical case of a $2-million winner--$100,000 a year for the next 20 years. Of this, $20,000 a year will be skimmed (or "withheld," if you prefer), but, unless you've got a number of other exemptions lowering your taxable income, it won't be enough.

In fact, according to the 1985 Tax Rate Schedule, if you are a single taxpayer your tax liability nudges above the 20% level (which has already been withheld) at about the $18,000 level, and at about $81,800 you are in the position where everything over that amount is taxable at the ripe 50% rate (the maximum). For the unmarried head of household, the 50% level is passed at about $108,000, and for the couple filing a joint return at about $162,400.

"So it's entirely possible for a single taxpayer, hitting a $2-million jackpot--$80,000 a year after the 20% withholding--and taking standard deductions, to end up still short $10,000 or $15,000," Giannangeli adds.

One bright spot on the Social Security front, according to Dana Edwards of the agency's external affairs department in San Francisco, is that any winnings in the lottery--small, big or great, great big--are a matter of absolutely no concern to that branch of the government.

Currently, that is, a Social Security recipient under age 65 can earn up to $5,760 a year without having his benefits reduced (50 for every $1 of earned income over that amount), those 65 and over can earn $7,800 a year, and those over 70 can earn any amount.

"However," Edwards adds, "lottery winnings are considered 'unearned' income and wouldn't affect Social Security benefits." Winnings are lumped right in with income from dividends, interest and annuities--none of which reduce benefits.

The one exception to this, Edwards continues, would be a lottery winner who is receiving SSI (Supplemental Security Income), which is available to those over 65, or who are blind or disabled and who have no other income. In California this translates to $533 a month.

"But this, unlike regular Social Security," he adds, "is based on need, and in any month where his income--such as from the lottery--exceeds $533, then the benefit is reduced dollar-for-dollar."

Isn't it fun to speculate about the woes facing us when we hit it really big?

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