We all dream of winning the lottery so we can enjoy financial security and do whatever we want with our lives. Whether you’ve won thousands or millions, hitting the jackpot is an exciting moment you’ll never forget. Now that you’ve got some extra zeroes in your bank account, you may want to share your newfound wealth with your loved ones. Here are some tips on how to give money to family and friends after winning the lottery to help you reduce your tax burden and maximize your winnings.
Avoid Gift Tax
The biggest hurdle you’ll face when you give money to family and friends after winning the lottery is gift tax.
The government limits the amount of money you can give away over the course of your life, which is called the lifetime gift tax exemption. Right now, you can give away up to $11.58 million without facing taxes.
Depending on how much cash you won, you may never approach that limit, or you might blow right past it. If you do reach the limit, you’ll have to pay a 40% gift tax on any wealth you share above the $11.58 million threshold. However, there are a few exceptions.
Gift Tax Exceptions
Money you give to a medical institution to pay for your loved one’s healthcare isn’t taxable and doesn’t count toward your lifetime gift limit. Tuition you pay to a loved one’s school is also exempt, as are gifts worth under $15,000. So if you only give each of your loved ones $15,000 per year plus help with tuition and medical expenses, you won’t use up your lifetime gift tax exemption or face taxes.
You can also stretch the annual exception further if you have a spouse. They’ll be able to give away an extra $15,000 per year to each loved one. This allows you to gift a total of $30,000 annually to family and friends ones without cutting into your lifetime exemption.
If you’re feeling generous and buy a loved one more than $30,000 worth of gifts in a year, make sure you keep track of all the money you spent and subtract it from your lifetime limit. That way you won’t get hit with a big, unexpected tax bill later.
Give Your Family Low-Interest Loans
Another way to get around paying gift tax and make your winnings stretch further is to give your family low-interest loans. The IRS doesn’t consider formal loan agreements between family members a gift. So if you and your loved one sign a legal document outlining the terms of the loan and they pay you back per your agreement, that money won’t be subject to gift tax.
Although a loan isn’t as helpful as a gift, you can set the interest rate lower than a bank would to give your family member a break. The loan could help them open a business, buy a home, or finance a wedding at an affordable cost, which will give them a leg up in life.
Watch Out for Tricky Tax Rules
Sometimes things that don’t seem like gifts are classified that way by the government. For example, letting a loved one live in one of your homes rent-free may count as a gift. Charging them less than fair market rent may also have gift tax implications.
So if you won big and are planning to support your family, it’s a good idea to consult with a wealth management professional to figure out how to do it without racking up a big tax bill.
Don’t Give Away More Than You Want To
Many lottery winners go broke because they’re too generous with their money, so it’s important to carefully consider how much you want to give away. Although $100,000 or $1 million may sound like a lot of money, it can disappear quickly. Between paying off your student loans, buying a house, and saving for your future, you may not have much money left to spare.
Although your family and friends may pressure you to shower them with gifts, take your time when deciding how much wealth to share with loved ones. Talk to a wealth management advisor and figure out how much money you need to be financially secure before you start gifting cash to family.
Would you give money to family after winning the lottery? Why or why not? Let us know in the comments section below!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.