If you haven’t heard- the 42 state lotto, Mega Millions is over half a billion dollars. Since we’re finishing out tax season we thought it would be good to highlight one last tax post. We’ll discuss the taxes on your lotto winnings, as well as gross income generally.
If you are from New Hampshire, Tennessee, Texas, South Dakota, Washington, California, Pennsylvania or Delaware you will win the biggest in tonight’s drawing- winning between 3% and 9% more than if you were from any other state because you won’t have to pay state income taxes. However, all winners must count the winnings as income and are subject to the Federal income tax of 35% (or maybe more depending on your specific situation).
As for the rest of us, what counts as gross income can often be a confusing subject.
If you’re wondering what your gross income was for the year- generally speaking, any income from any source counts as income. That includes receipt of money, property, or services. The Internal Revenue Code specifies what income is and what it is not. If you’re not sure if something is income, the IRS applies a three part test to determine if something is gross income- check out the steps below to see if you qualify.
1) There must be an undeniable net accession to wealth. Are you better off after receiving the money, property, or service? If so, this counts as gross income.
2) The benefit must be clearly realized. This simply means that you did, in fact, benefit.
3) Does the tax payer have complete dominion over the benefit of the money, property, or service? For example, if you were given a car, but the title was in the name of another, or there were restrictions on use- you may not have complete dominion. In most instances, this will be fairly straight forward.
The easiest example is if you are given cash- easily all three are met. Other situations that are a little trickier are if someone else pays your rent, your mortgage, or even you food bill. Even trading services for services counts as income- as if you had just handed each other the same amount of cash!
Unfortunately, if you received something that created an economic benefit for you, it is probably income. However, there are many exceptions, exemptions, and deductions that may also apply. Consult your trusted advisor for more information.
In the meantime, buy a ticket for fun. Big money like this rarely comes around- it’s at a record for a reason. You never know if you may be the lucky lotto jackpot winner!