Ep. 36 | You Won $1,000,000! Now What?
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Hey, everyone, and welcome back to Teaching Taxville, the podcast. Onto episode 36 today, we're gonna talk about what you would do with a million bucks. Now, not a million bucks earned directly, but what a million bucks, Whether that be the lottery, etcetera. Let's talk about it. Let's see what you would do with that million dollars and really just let's talk about how to keep it.
Speaker 2:So, before we jump into the show, let's take a moment as always thank our sponsor.
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Speaker 2:Hey, everyone. Back to teaching tax flow, the podcast, your home for comedy hour or as, like, we like to say, we think we're funny. But on a serious note, back by unpopular demand just kidding. Chris Chris Bucchero, my partner in crime on the podcast. How are we doing, Chris?
Speaker 4:Johnny t. Good to be back, my friend. How are you?
Speaker 2:I I'm doing great, man. And this was another topic that came to us from our defeating taxes private Facebook group by one of the guests. So let's jump right into it. You obviously if you're smart, you read the show notes a little bit. You've seen it in the title.
Speaker 2:We're gonna talk about what in the world would we do if we won a million dollars. Now little disclaimer with that. Right? Or I should say a little bit of clarity. $1,000,000, we call a lottery.
Speaker 2:Well, maybe you were playing, penny slots and you just got every machine in there. You won a million bucks. However it was, you took a lump sum. So this was not something that you took over, you know, a long period of time. Lump sum, but our goal in this is to obviously dream a little bit.
Speaker 2:But to really talk through how we could keep as much of that million dollars as possible. Right, Chris?
Speaker 4:Absolutely. And, John, I'm happy you didn't get hit by the proverbial beer truck. Good to be with you back on this episode. Again, defeatingtaxes.com. We have so much fun in that private Facebook group, and we, yeah, we posed a question.
Speaker 4:What would you do if you won a million dollars? We're gonna assume that you won it as a lump sum and, not in periodic installments. And, you know, what would you do? John, what would you do, first of all?
Speaker 3:I don't know. So let let's set the stage for
Speaker 2:this a little bit. Right? So so it's funny that I that you're asking me what I would do because, literally, I don't gamble. My my joke my whole life was, you know, people say, oh, you know, do you go to the casino? Do you gamble?
Speaker 2:I said, well, you know, I I started a company when I was in college. I think that's one one heck of a gamble on its own. But say I had a scratch off ticket, whatever. I don't even this is how little I know about this. Like, could you even win a million dollars with a scratch off ticket?
Speaker 2:I'm sure there's some out there.
Speaker 4:No. I I think you can. I don't I don't play the lottery.
Speaker 2:Yeah. I don't know. Maybe we won the sweepstakes. Alright. Well, you know what?
Speaker 2:Let let's just play it dumb. So if anybody is, like, a scratch off ticket expert, please call me out on my lack of knowledge with this. But we'll just say I went in one day. I found well, it's gotta at least be a $50 ticket. We'll say I found $50 in the ground.
Speaker 2:I bought a scratch off ticket. Holy crap. I just won a million dollars. That'll at least fill up my 50 gallons of of diesel fuel in my truck at least one time. So so we're good with that.
Speaker 2:I'm happy. So one a million bucks. To be honest, I I know we've talked about this kinda casually, Chris. I think I would sit on it, which may not be the best thing to do for a little while. I'd sit on it at least for a month or two.
Speaker 2:I wouldn't tell anybody. I mean, I would tell my dog, but, you know, he would then tell my wife, and it would turn into a big thing. I I would at least tell my wife, Stacy, and say, you know what? We just won a million bucks. You're not getting any of it.
Speaker 2:It's me. I'm gonna buy a bunch of cars. Just kidding. Again, sit down for a couple months, take the emotion out of it, and then figure out what I can do with it. Right?
Speaker 2:So it's I would not buy a car as much as a car guy as I am. I would not buy a vehicle. I know some of my friends are gonna think I'm lying, but I think it's true. Depreciating asset. Not a fan.
Speaker 2:So, yeah, I don't Depreciating
Speaker 4:asset. Well, no. That is that's first of all, if you sit on it for that long, I'm sure the money's gonna be warm. But
Speaker 2:Yeah. Good point. Good point.
Speaker 4:But no, I think that, well, we had a ton of, comments and feedback. The concerns and the questions that are the the group had was one, can I claim it anonymously? And most importantly, two, how do I retain as much of that money as possible? AKA, how much am I gonna have to pay one of the three laws of teaching tax law, my involuntary business partner, the IRS, or if you live in a state that has tax, your state, because we know that tax agencies are your involuntary business partner.
Speaker 2:And before we get into trying to keep it, Chris, so what what would you say I mean, obviously, it's dependent on on everybody's situation, you know, state of residency, etcetera. If you won a million dollars and really didn't do any planning with this, what would be a safe assumption of a percentage you would have to fork over in taxes?
Speaker 4:Right. So you would you would be so teaching tax law, we teach different we diagnose and prescribe. Please go back to some of the original episodes if you haven't already. You would be what's called a red diagnosis due to the fact that you are in a high marginal tax rate. So from a federal perspective and state, I would say, depending on what state you live in, 35 to 40% tax.
Speaker 4:Okay. Let's just because
Speaker 2:I know casually people will say, oh, well, you you carve out half of it, and that's what you're always gonna have to pay in tax. I mean, I think that's kind of a, you know, a knee jerk reaction from people saying carve out half. But, you know, we get what they're saying. Right?
Speaker 4:Let's say 40 worst case scenario. And at that point then, your red dot so so this is a great point. This is why we have the Teaching Tax Flow podcast. We talk to our community all the time. You're gonna pay tax.
Speaker 4:You either pick the tax or your involuntary business partner picks the tax, and if you don't plan, then you're not picking your tax. So in a red diagnosis situation, meaning a high marginal tax rate, what you're looking for is, I'm gonna diagnose and then what prescriptions, what things can I do to offset this taxable income? And we also know with teaching tax flow, one of the laws is cash flow doesn't equal tax flow, meaning, if you took that money, I'll give you an example John, let's say you had a mortgage of $700,000 you take the money, you pay the $700,000 mortgage off, it leaves you with $300,000 your tax is $400,000 you're actually, you've gotta go for the extra $100,000 even though your house is paid off, or you're gonna pay interest penalty, etcetera, etcetera, on that. That's where I just want people to understand the genesis really of teaching tax laws, understanding the tax ramifications of your decision. Now we're not saying don't pay your home off, but understanding that how could you possibly win the lottery, pay your home off, and still have to come up with another hundred thousand dollars in that fact pattern?
Speaker 2:Right. And, I mean, you could you could look this up on YouTube, I'm sure, and watch endless pieces of content on lottery winners filing bankruptcy. Right? And either probably one of two things happened. Right?
Speaker 2:I I know there's a I know there's a story about other gentleman. I'm gonna I'm going off memory. Maybe it was in Texas or so. He he just gave it all away and then realized, if I remember it, like, oh, crap. I still need to pay taxes because I even just because I gave it away to people, some to Cherry, I believe.
Speaker 2:But the whole documentary, I think, on that. But then also too, like, a lot of people just spend, spend, spend, spend and then plan after the fact. So, like, my response earlier about I would try to take as much emotion out of it as possible is, a, you kinda realize, like, I didn't have this yesterday. I have it today. It's unless, you know, owe a bookie or something that I don't that I don't know about a bunch of cash, I'm not gonna be in trouble for anything.
Speaker 2:It's all about planning into it. Right? So, the horror stories about sports, you know, athletes, you know, getting large sums of large sums of cash, a little bit different, but, you know, it going out faster than it came in, etcetera, etcetera. So planning.
Speaker 4:We've had I've had in three times in my life have I don't know if you know this, but people that won over a million dollars come to us for tax. I did not know that.
Speaker 2:I knew there was one overseas that I knew about, but I didn't know about the other two.
Speaker 4:I didn't even count that when I was thinking of domestic domestic.
Speaker 2:Oh, okay.
Speaker 4:But anyway, yeah, there's an well, here's here's the situation. The gambling income is taxable on the federal tax return. If you live in a state that there's a state tax, you would pay tax on that in your home state. If you win the money in a tax that in a state that has a state tax, you're gonna pay tax to that state. Now, 99% of the time, you're not gonna get double taxed by states, you're gonna get a credit on your home state tax return for the tax you paid in the other state.
Speaker 4:So, John, you live in Michigan, you're out gallivanting around, and you hit the lotto in Vegas. There's no there's no state income tax in Las Vegas, the state of Michigan is gonna say, John, you're a resident of our state, you pay tax on all your income, you owe us in Michigan. Let's say you went in Louisiana, you owe us a million dollars in Louisiana, Louisiana is gonna say you owe us a million bucks for that, when we're gonna withhold and you're gonna pay $50,000 of tax, I'm just making it up. The state of Michigan will say you owe us a tax on a million dollars, that tax is $60, but we're gonna give you credit for the 50 you paid in Louisiana, so you just pay us the difference. So typically States have reciprocal credit, so you don't get double taxed.
Speaker 4:But, ultimately, if you either win or live in a state with a tax, that's gonna be taxable, and you're going to pay federal tax.
Speaker 2:Now So, basically, the moral of that story is gamble where there's noted state income tax and also potentially take a very small portion of those winnings, buy a condo, and change your residency in all the time. So
Speaker 4:Oh, yeah. Post win residency plating is always sound
Speaker 2:Thank you.
Speaker 4:Not a red diagnosis. Well so so then it comes down to if you have gambling losses, you can offset your wins with your losses on the federal tax return if you itemize your deductions. So not everyone itemizes their deductions. If you won a million bucks, chances are you may have lost some. Maybe you lost a hundred thousand, so that you would take a hundred thousand dollar deduction on the federal return.
Speaker 4:The challenge is most states don't allow for a deduction for losses. Many states just have a standard deduction instead of itemized deductions. So even if you won a million and lost a million, you could potentially owe a lot of money to your state. Great.
Speaker 2:Hopefully, you got a lot of free drinks while you're gambling, basically.
Speaker 4:Exactly. Just a couple of minutes. Million. What if you took, you know, the Detroit Red Wings to win the Stanley Cup at 20 to one and you bet $50 for some reason, and you won a million bucks? You would have won a million bucks.
Speaker 4:So just can think about that where so that's how it's taxed. Okay? Obviously, the low hanging fruit is make sure you record all your gambling losses to offset your gambling wins. And then your red diagnosis, where can you find additional deductions on your tax return to to offset this income? So if you're a real you know, we we if you are a business owner or a real estate investor, you might wanna invest in additional properties or additional equipment if it's something that you can use for your business.
Speaker 4:The and those those auctions could hopefully offset the gambling winning. You mentioned a great point, being charitable. Let me be clear. Gifting money to people is not a tax deduction. If you want a deduction, you have to give money to a qualified organization, and typically a, a tax exempt organization or a a church or a religious organization.
Speaker 4:What you can do though, is there if you want a million dollars and you wanna set aside $500, 6 hundred grand, 7 hundred grand for charitable purposes, at that point, you're gonna wanna use some more advanced tax strategies like creating a a a a charitable remainder trust or a family foundation or something that you could take advantage of your generosity the same year you want. Because even if you want to mail, let's say that was your only income, and you gave away 900,000 of it, you're limited for a charitable deduction to up to only 50% of your your income. So the point is, if you want to be ultra charitable, then we need to create some type of separate entity to assist you in in making sure those wishes are taken care
Speaker 2:of. And circling back a little bit too. So just for anybody who's not familiar with, you know, color coded diagnosis, so within teaching tax law. So you mentioned a red diagnosis. So that is a high marginal tax rate or MTR as as we reference it and and kinda bounce back and forth.
Speaker 2:So that is not I know the answer to this, but kinda give us the the recap again in a little bit more detail. So your marginal tax rate is not your tax bracket. So kinda give us the differences between that for those that are not familiar with marginal tax rate. So right. Your tax bracket is is just a that's
Speaker 4:what it say, ignore your tax bracket. It's irrelevant, really. Your marginal tax rate is, for every additional dollar of income that you recognize on your tax return, how much is going to your involuntary business partner, Uncle Sam? For every additional dollar of deduction, how much of that do you get to keep? Because the marginal tax rate factors in many things separate from your tax bracket.
Speaker 4:Your tax bracket's static, your marginal tax break bracket is your marginal tax rate's dynamic. Alright? So the marginal tax rate's your most important number when it comes to tax planning and strategy.
Speaker 2:And just because you're a red diagnosis is a high MTR is not a death wish for your bank account. It just means that there's different strategies that you implement. Correct?
Speaker 4:Exactly. That is the case. So when you're a red diagnosis, then you have to look at, okay, well, what is your situation? Are you an individual person with a w two? Are you a retiree?
Speaker 4:Are you are you a real estate investor? Are you a business owner? And then we would have to look at different strategies. The bottom line is if you do think about it like this. If out of the million dollars, you deploy a certain amount, whatever you want, you know, let's say you said, well, I've got, I really wanted to keep $200, another 800,000 I'm going to deploy into investments or tax advantage investments or, let's say, buying real estate or whatever, being charitable, that the money that you deploy in general can be tax deductible if it's structured properly.
Speaker 4:If it's just for the family members, call it a charitable deduction, that doesn't work.
Speaker 2:So technically speaking and you know you know me, I like to come up with these weird hair hair brained ideas. And giving yourself the most flexibility, right, on implementing strategies. Right? So some are year end, some are post year end. So you there's some are blind.
Speaker 2:I mean, some you can so you can do both sides of fence, but some definitely are by year end. So I believe we are probably episode maybe eight. I think we're under 10 where we use the examples of, you know, we're out on New Year's Eve and whatever happened. So what if what if you were at the casino or wherever you were, and you technically won a million dollars and and there might not even be a real answer for this. I just love these stories.
Speaker 2:Say you had a million dollars and chips on the table that you just won. K? It's, like, 11:58PM Eastern Standard Time. We got a couple minutes till stroke of midnight, and then it's the next year. Technically, if you don't cash in those chips, if you don't get too excited, go cash them in and take the cash.
Speaker 2:It kinda buys you some time. Right? So then you're into the next calendar year. Right?
Speaker 4:Potentially. I mean,
Speaker 2:this is the dumbest example on the planet, but you know how my brain works.
Speaker 4:Right. Now in general, you know, it's when you're gonna redeem, you know, when you redeem that the money. Right.
Speaker 2:I love making your making your head spin it. I can tell you're thinking, like, just shut up, man. Like, it's not I
Speaker 4:mean, that that's so hair bright. Yeah. I kinda that's a little fence.
Speaker 2:But no. Totally. But, yeah, it's it's there is it it is important to consider that, though. Not that specifically.
Speaker 4:I mean, realistically, it wouldn't be constructively received and I mean, you'd have to cash it out. The banks are closed at that point. The next day is a federal holiday. It would probably go into the next day the next year, most likely.
Speaker 2:But And that's why you're a successful CPA.
Speaker 4:I'm just saying so what are you gonna do? So your options are, again, being charitable, investing in something, really, you're, you know, you want to at that point figure out, and I like what you said, take a step back and really think about what you'd wanna do. Mhmm. Right?
Speaker 2:What would you
Speaker 4:do? Make an impulse decision.
Speaker 2:If you won a million dollars today, what would
Speaker 4:you do? Oh, that's a great question. I would not tell anyone, first of all. Except Holly, I should probably know. Right.
Speaker 2:They keep us in line, these women.
Speaker 4:I wouldn't honestly, I wouldn't tell our kids. I would just go about our business and I would probably, I'd probably maybe I'd buy a new car. Nothing crazy. I'd trade my I have an older car, the Haas, and I like it.
Speaker 2:Hey, it's over £6,000.
Speaker 4:It's over £6,000? Maybe I'd spend like $50 on a car, which is a big would be that's a lot for me because I'm not a car guy. I would probably start buying, I'd I'd I'd I'd invest it. I'd make I'd invest in some real estate. I'd invest in different asset classes.
Speaker 4:Like, some of the same stuff we're doing now is just on a bigger you know, even more because I would wanna be setting myself up for that to really start producing income in about ten years. So That's what
Speaker 2:I would very conservative with money
Speaker 4:in the 05/29 plans. But other than that, it's not really gonna change much as far as, yeah, maybe a little splurge. Maybe I'd stay at the, JW instead of the Spring Hill Suites or something. I don't know. But We'll get
Speaker 2:we'll get you a nice wig. Make you look like Bob Ross or something. You know?
Speaker 4:I'll sit there. When I went and claimed the prize in, at the state of Tennessee, I'd have a wig on.
Speaker 2:There you go. We'll give we'll give you a, let's see. So you're a Tigers fan, baseball, Detroit Tigers fan. So maybe we'll get you, like, a, I don't know, maybe a Yankees T shirt or an Indian shirt and and a Bob Ross wig. Nobody will ever know it's you.
Speaker 4:Exactly. I I you know, honestly, I would probably take a hundred grand and create some type of give about a hundred thousand away to charity. Somewhere either faith based or there's some other causes I'd like to just do. And, but yeah.
Speaker 2:And maybe that's a question too we can kinda pose to the group one day is, you know, what would what would our group like to do with it? I know we kinda talked about it a little bit, you know, and and some of the responses there, but, you know, maybe looking at some specific examples or, you know, what would somebody do with 10,000,000? Or I would say a hundred million or 200,000,000, but usually when you get to that point, you're it's you and about 10 other people that won the same amount, so you kinda get divvied up. But but, no, this was great.
Speaker 4:Yeah. I'm sure. So the thing is you're gonna right. You're going to be you it's you're going to pay tax on it. It's gonna be taxable.
Speaker 4:You're not gonna necessarily pay tax on it. It really depends on what you do. It's up to you if you wanna sing from the rooftops that you won. There are several states that allow you to use an LLC or trust, as opposed to claiming the prize personally. I'm going we we will put a, the link to to that resource in the show notes as well.
Speaker 4:And you know, and then at that point, you're gonna want to think about who's who's the first couple people you call, potentially an attorney, potentially your tax professional, and be very, if you want to be, generous, then think about the strategy. So let's say you said, Oh, I want to buy my mom a house, it's $200,000 Well, maybe you buy the house. Maybe instead of triggering some gift tax issues, you put a mortgage on it, and your mom pays you a little bit of mortgage every month, and you have what's called a you could pair it with some estate planning, a, a skin, self canceling installment note or something like that. So there's just the theme, Johnny, is as we always say, if you do nothing, the tax agencies are gonna pick your tax. If you do something, you you have the opportunity to pick your tax.
Speaker 2:If you do nothing with your if you do nothing to plan around that much winnings, you might as well assume that you're gonna be paying some IRS salaries for some for some agents.
Speaker 4:But Absolutely. And potentially state. There you go.
Speaker 2:Alrighty. Well, in that note, everybody, best of luck to you. If you are in the hunt to win a million dollars, do not come to me for advice. Don't exactly know where where to tell you you could win that effective effectively. Yeah, I'm not your guy for that one.
Speaker 2:And I I know, Chris, you're not you're not a scratch off lotto guy either. So you guys are the wrong place if you're looking for tips for that. But if you do win it, we can help you keep it. So thank you everybody again for joining us here on the podcast. We had fun with this one.
Speaker 2:Again, thank you for for those members that chimed in on the defeating taxes Facebook group. Let us know this topic. Shoot us over some other fun ones that you may have. I mean, I can't be the only one here shooting out hair brained ideas. So we the crazier ideas and situations y'all have, shoot them over.
Speaker 2:I need somebody in my corner coming up with the crazy stuff that we can harass Chris with. So until next time, everybody, we will see you soon. Actually, we will see you next week. Hey, everyone. John Trubolski still here from the Teaching Tax Flow team.
Speaker 2:Thank you for listening in on this show as always. We know we have a lot of fun with these. Thank you for submitting that topic. I it was a it was a great one to talk talk through just for a couple minutes before we even recorded it. We kind of jumped right in it, threw Chris on the spot and dove into
Speaker 4:his brain a little bit there for a bit.
Speaker 2:But hopefully, you got some good information from here. Now, taking into account, maybe you won't win a million bucks. Maybe you'll win $10.20, $3,050,000, a hundred grand, etcetera. Really, the point of this was to really just get along or get around, I should say, some of the concepts and how to maintain as much of those winnings as possible. So, again, fun one we did a little bit out of the box but hopefully everybody enjoyed it.
Speaker 2:As always, we look forward to seeing everybody and hearing from everybody very soon. Take care.
Speaker 3:The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney.
Speaker 3:Investment advisory services are offered through Cabin Advisors, a registered investment advisor. Securities are offered through Cabin Securities, a registered broker dealer.
