Quote:
Originally posted by Eclipse
Not 100% true....if you receive a cash distribution like lottery (over a certain amount only, I think) or, say a 401K early withdrawal the IRS most certainly wants an "estimated" tax paid upfront. Then, at tax time you are expected to square up. I don't know if they do this with actual gifts like cars, but they do it with money.
I know when you see lottery winners with those 500 bigillion dollar checks that is not what is actually put in their bank accounts.
|
I don't want to bore the thread with the tax code so I'll try to keep it simple, lol. Technically, the IRS assesses income taxes once a year. Throughout the year you can make estimated payments (w/h form your paycheck or just payments because you make too much money) to avoid having to pay taxes at all or the underpayment penalty. They don't penalize you for getting unexpected income and assess an estimated tax on you because of it.
In the case of lottery winnings, you will receive the net amount (whoever issues the 1099 does the withholding) so it's not like you really saw the money or really got the full amount. It's treated like wages paid by an employer who withholds the taxes hence the "net amount". Estimated payments and w/h are technically not the same thing. In the case of prizes, you get a 1099 for the value, no taxes are taken out and you aren't expected to make an estimated payment at that time. Can you willingly make a payment? Yeah, sure. But why up and give the IRS the money when it can stay and collect interest until it's actually due. I recall one client in this situation and we never made an estimated payment because of their new income.