Lottery fever remains at a high level lately, thanks in part to jackpots that sometimes exceed $1 billion, including the $1.334 billion Mega Millions winning ticket sold in July to individuals in Illinois, who claimed the prize via an anonymous partnership. They opted for the lump-sum amount.
While those winners chose the lump sum, if a newly wealthy winner comes to you for advice about how to receive the windfall, we strongly recommend carefully evaluating the installment option before claiming the prize.
Installment vs. Lump Sum
Most lottery winners elect the lump-sum option, and their reasons for making this choice are often erroneous. Many believe that installment payouts stop if the winner dies. This is not true. Or they fear the state and/or lottery commission could go bankrupt before they are fully paid out. This is highly unlikely since the installment obligation is backed up by a “laddered” bond portfolio. Other concerns include higher tax rates and/or high inflation in the future — which are valid concerns that should be factored into the analysis.
Taking the lump-sum option on a multimillion-dollar prize is usually a poor decision, partly because winners will take a permanent net-present-value haircut of 30% or more on their payout, plus pay 100% of the tax in the first year of winning.
To explain further, the advertised winning amount is the pretax payout over several decades, often 30 years. By patiently waiting for their annual installments, the winner(s) will receive the full advertised winnings. By electing a lump sum, on the other hand, there will be a time-value-of-money discount, which generally falls in the mid-30% range but can be as high as 39%. (This discount decreases with larger prizes, since a smaller annual return is required to compound the lottery commission’s initial investment and increase to the full prize. Due to the record amount of the recent Mega Millions award, the actual discount rate on the lump-sum payout reportedly dropped to a record low of 17.65%, which may have factored into the Mega Millions jackpot winners’ decision to take the lump sum.)
As a result of the continuing COVID-19 impact on businesses and individuals the IRS released a second Notice (IRS Notice 2021-10) on January 19, 2021 to provide Opportunity Zone (OZ) investors with additional time to roll capital gains into a Qualified Opportunity Fund (QOF), as well as additional time to make “substantial improvements” to acquired property and additional time to acquire Qualified Opportunity Zone Business Property (QOZBP). This Notice follows the June 2020 Notice 2020-39 which extended various 2019 and 2020 OZ Program deadlines and testing dates – generally through December 31st. The extended relief under 2021-10 is generally through March 31, 2021.
Details of the relief given by Notice 2021-10 are outlined below:
- 180-day investment period.Previously, Notice 2020-39 had postponed the investment period to December 31, 2020. Notice 2021-10 further postpones the last day of the 180-day investment period to March 31, 2021, if the last day of the original 180-day investment period fell on or after April 1, 2020
Cryptocurrency continues to gain popularity both as an investment asset and as a means to pay for goods and services. The growing ease with which a person can buy, hold and sell cryptocurrency has resulted in an explosion in crypto transactions – and, in turn, has left taxpayers needing to account to the IRS for their newfound cryptocurrency gains (and losses).
This powerful trend reached a new peak in 2020 when, as a result of COVID-19 disruption, related worldwide economic uncertainty and entry of companies such as PayPal into the consumer market (allowing more than 300 million users to easily buy cryptocurrencies), the crypto-market witnessed a dramatic run-up in the values of Bitcoin and many other cryptocurrencies.
Cash basis taxpayers have a large number of ways to control their 2020 reported taxable income which is even more important this year since we may be moving from historically low tax rates to much higher rates post-2020.
While a Biden victory appears fairly certain, we find ourselves in the position of not knowing whether the Democrats or Republicans will be controlling the Senate. The two federal Senate seats in Georgia will not be determined until January leaving us with significant tax planning uncertainty. These seats are unsettled since neither candidate won over 50% of the votes cast. The Republicans just need one of these seats to control the Senate, while the Democrats must win both seats.
Senate control is critical to determining whether the Biden Administration will be able to push though their promised tax increases (see attached summary) including increasing ordinary tax rates (from 37% to 39.6%) and long-term capital gain rates (from 23.8% to 39.6%) for taxpayers with more than $400,000 and $1,000,000, respectively, of taxable income.
More tips about determining the right corporate, partnership or other structure that’s best for your business—and where you are in life. Key Takeaways:
- The legal structure of your business operations can have a significant impact on your annual income tax and estate planning.
- When you and/or your heirs expect to be at or near the maximum income tax rates, you will generally want to leave appreciated and appreciating assets in the taxable estate, rather than transfer them prior to death.
- In general, assets with the potential to appreciate in value should not be placed into an S or C Corporation.
TaxConnections is fortunate to have tax expert Blake Christian as a member of our platform. Given my expertise searching for tax experts for corporations worldwide, I can assure you Blake Christian is a leading tax expert on the new Opportunity Zone Program. He advises multinational corporations and he is sought out frequently by tax firms all over the country who consult with him.
Take this opportunity to receive a copy of all of his educational articles on the topic of the Federal Opportunity Zone Program. Whether you are a tax executive with a multinational corporation, a Tax Partner with a firm, or a CFO, you will learn how to utilize these extraordinary tax incentives to save your organization significant tax dollars.
Register Here To Receive Valuable Information On
The Federal Opportunity Zone Program
- Which Gains Are Eligible?
- Qualified Opportunity Fund Requirement
- Tax Basis Adjustments/Gain Reporting Exemptions
- Legal Form Of Qualified Zone Fund
- Percentage of Qualified Property Test/Penalty
- Ineligible Business Types
- State Tax Complexities
- Real Estate “Original Use” Rehab Requirements
- Who Should And Should Not Invest In A QOF?
- Hiring Tax Credits – 8500 Tax Incentive Zones
- 5 Myths About The Opportunity Zone Program
- 5 Ways To Leverage The Opportunity Zone Program
- Opportunity Zone Participation Window
- Open Issues On Opportunity Zones
- Investment Diversification And Tax Savings