won $1M from lottery, how to minimize taxes

So the other day, my wife (and I!) won $1M on a Scratchers ticket. We're planning to see a CPA and possibly a (flat-rate) financial planner, but before we do so, I'd like to be armed with FW's input. For now, my question is what, if anything, can we do to minimize our tax liability?
Here's the relevant info:

~$650k net winnings after federal taxes (CA does not tax lotto winnings)
31-32 years old w/ no children yet (would like to retire early, if possible)
~$300k income per year, both attorneys (paid over $110k last year in state/fed income taxes)
own a home, no plans to upgrade - $410k mortgage at 3.5%
own two investment rental condos - total $225k mortgage, ~$600-750/mth cash flow positive
~$2,000 per month in student loans at 0.875% interest rates (thanks to FW and UHEAA)
two cars, owing about a total of $30k at 2.49% interest (these will probably be paid off with the winnings and no plans to upgrade)
no credit card debt

We both have been very fortunate in our lives and will probably donate/give to charities and our parents, a total of approx. $200k.
Obviously, we'll be also max out the 401k's this year. But is there anything else we obviously should be doing?

Any thoughts are appreciated. I know the CPA will (should) know a lot, but you guys come up with some creative stuff. Thanks in advance.

Congrats on having your startup acquired.

The good news. You're both already successful so an extra 650k isn't going to make any difference in your lifestyle. You've just received 1-2 years income extra. Remain calm and don't do anything crazy. Invest it according to your existing plan and try to just ignore it, except for enjoying the calm feeling that having a nice brokerage balance gives you.

Congratulations!

SUCKISSTAPLES said:   Unfortunately $650k isnt too much in CA, and since they are taking taxes out upfront, it matters little what you do.

Why is that? If what they are taking out are truly "taxes" and they take too much out, can't you just get back the difference when you files your taxes next year?

SUCKISSTAPLES said:   Congrats!!

This is a FW member for 6 years, not an altID and likely not a troll

Unfortunately $650k isnt too much in CA, and since they are taking taxes out upfront, it matters little what you do. You can pay off all your debt if you want simplicity of finances, but at the low interest rates you are paying, you can easily earn more with your money.

Thanks, I primarily lurk here. Found a few great deals over the years, e.g. UHEAA, Penfed, App-O-Rama, etc.

For whatever reason, CA Lottery will only take out 25% for taxes. It's incumbent on us to pay the extra 10%. Does that change your calculus?

Oh,
And congrats OP. I have no useful advice. Sorry.

peekay331 said:   SUCKISSTAPLES said:   Congrats!!

This is a FW member for 6 years, not an altID and likely not a troll

Unfortunately $650k isnt too much in CA, and since they are taking taxes out upfront, it matters little what you do. You can pay off all your debt if you want simplicity of finances, but at the low interest rates you are paying, you can easily earn more with your money.

Thanks, I primarily lurk here. Found a few great deals over the years, e.g. UHEAA, Penfed, App-O-Rama, etc.

For whatever reason, CA Lottery will only take out 25% for taxes. It's incumbent on us to pay the extra 10%. Does that change your calculus?What they "take out" for taxes has nothing to do with how much you owe for taxes. It's like the income tax withholding from your paycheck.

if retiring early is a major goal then id just put this in tax efficient index funds. id search bogleheads.org for more information.

prostoalex said:   If you have any AMT-generating events (incentive stock options at your current employer), exercise to generate AMT events to win in the AMT vs. income tax fight at the end of the year.

Otherwise you've nailed most optimizations, and there isn't much you can do with this type of income. You can't really have an expensive surgery on demand.

ouch, good point--I forgot that the AMT will likely kick in. We got hit with that a couple years ago before we bought a house -- we had no special deductions but live in a state with high income taxes.

What about any other retirement options, IRA, Roth IRA, etc? If I recall, there are very few ways to avoid the AMT.

dhodson said:   if retiring early is a major goal then id just put this in tax efficient index funds. id search bogleheads.org for more information.

thank you for that info. I will look up that site.

You will not be able to deduct Traditional IRA contributions this year because your gross is over 100K (thanks to the lotto winnings).

Congratulations on your windfall! Now that you actually have a positive net worth, review your asset protection situation, i.e. professional and personal liability insurances, structure of real estate holdings, etc.; don't tell anyone you won; and most of all keep it in your pants.

Personally, if I was in your situation (with a net of $450k after taxes and donating $200k) I would pay off the home - or as much of it as I could. I know this would not decrease you tax liability, and would actually increase your taxes in the future, but I research the psychosocial aspects in sport and the common investment advice for athletes is conservative, conservative, conservative. For instance, financial advisers will never advise a professional athlete to try and make 8% on their money with the risk of losing it. Instead a conservative 1-2% is the way to go, because who cares if you don't turn 1 million into 2 million... at least you did not end up with $300k.

You already have enough money to live very comfortably - even if you did not win the lottery. Thus, paying the house down or off would give me the peace of mind that I owned something free and clear and I could then take the mortgage payment I would make every month to use how I please with minimal repercussions.

I am not 100% sure about what I am going to say - but check it out.

1. If you are not subject to AMT (which is very possible since you won't have a lot of deductions relative to the taxes), then look at what deductions can be accelerated to this year. This could include taking capital losses. But obviously limited to $3000 in losses - but make sure that no cap gains (including mutual fund distributions).

2. If you are subject to AMT, AMT is funny. As the income increases, the AMT exemption decreases. But at some point, it gets wiped out. Once it gets wiped out, it might be worth accelerating income from next year.

Best is to work out your taxes and add/subtract income/deductions to see what works best.

Lawyers play scratch tickets?

KajeYomama said:   

If AMT kicks in, mortgage interest (on your home) will go, .

??? Text

Interest expense deductions for individuals may be adjusted.[38] Generally, interest paid on debt used to acquire, construct, or improve the individual's principal or second residence is unaffected. This includes interest resulting from refinancing such debt

KajeYomama said:   

You will need to be paying estimated taxes ASAP or else you may have an under withholding penalty by the end of the year (of course unless you are getting some withheld from the lotto winnings). Avoid this if you can.

.

OP can use safe harbor of 110% of last yrs taxes so perhaps no need to panic so much for est. taxes but , of course, would have to pay balance next Apr.

Awesome! I just cashed a customer's $500 California Lotto Scratcher this past Sunday. That was the largest Scratcher prize I've ever cashed.

I would also try to make sure no one finds out about it. No friends, family, nothing. While we all think it's not a life-changing amount of money, your friends and relatives are not going to agree and they're going to start hitting you up.

My bf, a financial advisor in CA, suggests that you should talk to a financial advisor. Please keep in mind that this is only information based on what you have provided in the post and should not be followed without talking to a financial advisor. However, given the information, he suggests the following 2 options:

(1) Variable Universal Life Insurance Policy (VUL): The premiums paid into the VUL are invested in various investment options and grow as a cash value separate from the death benefit. It is from this cash value that you can take tax free withdrawals or loans from the policy. Financial advisors will often use a VUL for people who have maxed out their 401(k) and want to have a separate source of retirement savings. While it is a life insurance policy, it can be utilized as a retirement tool as withdrawals can be made from the cash value. This is usually the best way to mitigate tax consequences.

One issue that many people have with using a VUL is the relatively high fees early on. However, the tax mitigating benefits in the long run often make up for the higher fees in the beginning. Depending on what company you choose to go with the fees will generally be higher in the initial 5-10 years given that it is life insurance and the company needs to mitigate its losses should you pass away early on. However, generally after 5-10 years the fees will reduce. Also keep in mind that aside from this being a potential tax free income, you also have a death benefit.

(2) Variable Annuity: A variable annuity will allow you to have a guaranteed source of lifetime income for retirement. However, the drawback for a variable annuity is that you cannot make withdrawals prior to age 59.5 without incurring a 10% penalty by the IRS. Furthermore, unlike a variable universal life insurance policy, variable annuity withdrawals will be taxed as income.

Hope this helps!

EDIT: So what's with all the Reds? I seem to be the only person who thinks OP should plan for retirement using the $$. The key is to PLAN for retirement. Not wait until you get there to realize you've saved absolutely nothing. And then you wonder why there's so many people out there have saved absolutely nothing when it comes time to retire. Go figure.

aznxsoulrave98 said:   I just graduated college not too long ago and got into a financial advisory firm. Due to the downfall of the financial services in the last few years, there has been a huge layoff in my firm. But I was fortunate enough to remain in the company. Because of the lack of employees, I was forced to learn quite a lot about the whole financial planning process. 650k is a good amount to invest into a supplemental income program. If you are interested in the details, please feel free to leave me a message.I am interested in entrusting my money to a newly minted college graduate who works for a financial services firm that has laid off all of its experienced people. Where do I sign up?