There is nothing quite like winning the lottery. In almost all cases lotto winners go from rags to riches overnight. There is definitely a thrill and exhilaration that comes with becoming an instant multi-millionaire. Who wouldn’t want to win the lottery? Hold that thought. Winning the lottery comes with several possible catches that could lead to tax trouble. In fact, for some lottery winners, the tax fallout is a real nightmare.
The tax headache can be especially big when several people decide to purchase lottery tickets together, as a group, which is exactly what happened to some recent lottery winners in Tennessee. Twenty co-workers won a $420.9 million Powerball jackpot in November, with the lump sum payment being $254 million. Split evenly, each winner will receive $12.7 million before taxes.
However, the first question that must be answered is could this group be considered a real partnership? The 20 winners have been pooling their money together for eight years, so it’s a legitimate question. It’s also an important one as it could make a big difference in how they report it and their overall tax bill.
Another question is could their agreement be viewed as a trust? If the IRS considers it a grantor trust it’s simply taxed as a flow-through. However, if it is a more complex trust that is taxed the same as a corporation the tax headache can be huge and expensive. So, what should you do if you become an instant millionaire? If you ever end up choosing the right numbers, the smartest thing to do is talk with a qualified tax professional before you even collect the money. This will help you avoid several possible headaches.