A sudden windfall can change the course of a person’s life. People who win the lottery or receive a sizable inheritance may be able to make changes to their lifestyle and financial habits that yield long-term, positive results. However, many people who receive large windfalls actually struggle to make optimal use of those new resources. For example, people may fail to plan appropriately for taxes, resulting in major financial challenges the year after their windfall.
Reviewing recent good fortune with a legal professional familiar with federal and state tax regulations can help Washington residents properly manage the tax responsibilities that come with a lottery win or a large inheritance. What tax considerations do those with good financial fortune generally need to address?
Taxes for lottery winners
The federal government imposes a significant tax on lottery winnings. State authorities in Washington and elsewhere report lottery winnings as income to the government. The winner generally needs to pay at least 24% in mandatory taxes. Typically, the lottery authority withholds that 24% from the amount paid out to the winner.
Depending on whether the winner requests a lump-sum payout or regular payments through an annuity, the lottery winnings could potentially push them into a much higher income tax bracket. In some cases, the tax rate that applies could be as high as 37%.
Washington State does not assess either a lottery tax or an income tax. However, the state may conduct a check to validate that the winner does not owe debts to the state, such as child support. The state may intercept a portion of the winnings to cover financial obligations.
Taxes for heirs and beneficiaries
Those who inherit a sizable amount may worry about taxes. However, neither Washington State nor the federal government directly taxes inherited assets. Instead, tax obligations fall to the estate itself. Multi-million dollar estates may need to pay both Washington state and federal estate taxes. That occurs prior to the heir or beneficiary receiving their portion of the estate.
That being said, beneficiaries could theoretically owe other taxes based on what they inherit. There could be income taxes due if the assets generate revenue. Both profit from investments and rental income could contribute to income tax obligations. Additionally, the sale of major assets could lead to capital gains taxes.
People hoping to preserve as much of their financial good fortune as possible may need help planning to properly address their tax obligations. Working with a tax lawyer can help lottery winners and those inheriting property ensure that they fulfill all of their tax obligations and may even help them minimize what they’re required to pay.