Finding the Rock in the Lottery Jackpot

Question: Now that we have the California State Lottery, a question occurred to me that I think many other of your readers may be wondering about.

First, are lottery winners subject to state and federal income tax? If so, how much?

Persons who are receiving Social Security benefits are allowed to earn a certain amount of money without losing any of their Social Security payments. Are lottery winnings considered to be money earned ? If a person receiving Social Security should be lucky enough to be the winner of a sizable amount, such as $10,000 or $25,000 or more, would winnings like this affect his Social Security payments and, if so, to what degree?

Bear in mind: This is all hypothetical. Unfortunately, neither question is a real source of worry for me.--H.L.

Answer: You know what they say: Death and taxes. You can bet your last enchilada that lottery winnings are taxable--at least as far as Uncle Sam is concerned. The bright spot here is that lottery winnings are exempt from California taxes.

However, Robert Giannangeli, a spokesman for the Internal Revenue Service, hastens to add that the California exemption applies only to the California lottery. If you wander afield and win Downtown Tucson in the Arizona lottery (or New York, or Michigan or Massachusetts), then this is fully taxable by the state. A little freebie for the home folks.

No such charity is extended by the IRS, however. Every dime you win in the lottery is considered taxable income; although, if push came to shove, minor winnings would be a little difficult for Uncle Sam to establish because all of those losing tickets you’ve bought are, technically (and if you can prove you bought them), deductible against your winnings. It’s an argument, although not a compelling one, for saving all of your losers.

The actual reporting--by the state to the IRS--of winnings starts at about $500, but withholding itself (20%), doesn’t begin until the $5,000 level, Giannangeli continues. As the lucky winner of, say, $50,000, you would receive $40,000 in cash and your copy of Form W2G (“Statement for Recipients of Certain Gambling Winnings”), which you would attach to your next Form 1040 for proper credit.

And, yes, you’ve guessed it: For certain high rollers, that 20% withholding could still leave you stuck for additional federal taxes over and above the amount withheld.

As long as we’re fantasizing here, we might as well take the hypothetical case of a $2-million winner--$100,000 a year for the next 20 years. Of this, $20,000 a year will be skimmed (or “withheld,” if you prefer), but, unless you’ve got a number of other exemptions lowering your taxable income, it won’t be enough.

In fact, according to the 1985 Tax Rate Schedule, if you are a single taxpayer your tax liability nudges above the 20% level (which has already been withheld) at about the $18,000 level, and at about $81,800 you are in the position where everything over that amount is taxable at the ripe 50% rate (the maximum). For the unmarried head of household, the 50% level is passed at about $108,000, and for the couple filing a joint return at about $162,400.

“So it’s entirely possible for a single taxpayer, hitting a $2-million jackpot--$80,000 a year after the 20% withholding--and taking standard deductions, to end up still short $10,000 or $15,000,” Giannangeli adds.

One bright spot on the Social Security front, according to Dana Edwards of the agency’s external affairs department in San Francisco, is that any winnings in the lottery--small, big or great, great big--are a matter of absolutely no concern to that branch of the government.

Currently, that is, a Social Security recipient under age 65 can earn up to $5,760 a year without having his benefits reduced (50 for every $1 of earned income over that amount), those 65 and over can earn $7,800 a year, and those over 70 can earn any amount.

“However,” Edwards adds, “lottery winnings are considered ‘unearned’ income and wouldn’t affect Social Security benefits.” Winnings are lumped right in with income from dividends, interest and annuities--none of which reduce benefits.

The one exception to this, Edwards continues, would be a lottery winner who is receiving SSI (Supplemental Security Income), which is available to those over 65, or who are blind or disabled and who have no other income. In California this translates to $533 a month.

“But this, unlike regular Social Security,” he adds, “is based on need, and in any month where his income--such as from the lottery--exceeds $533, then the benefit is reduced dollar-for-dollar.”

Isn’t it fun to speculate about the woes facing us when we hit it really big?

Q: I’ve had a lot of trouble with my dry cleaner and his handling of my suede jacket--in spite of the fact that the cleaner “specializes” in cleaning suede. The first time out it came back stiff as a board, badly rumpled and not at all clean. I immediately had suspicions that, accidentally, it got thrown in with his regular dry cleaning. He neither confirmed nor denied this, but agreed to do it over. It took three treatments before I agreed to accept it, and even then not too happily. There are still lumps in the fabric and a few puckered seams. I would have made an even bigger fuss if the jacket hadn’t been bought through a garment district outlet, and I had a few trepidations about the workmanship even though I love the jacket.

What really baffles me, though, was his comment when I finally agreed to accept the jacket:

“Next time you buy suede,” he said, “get lambskin instead of pigskin and you won’t have this trouble.” This suggests to me that pigskin is inferior to lambskin. And, yet, just a couple of days later, one of our most prestigious department stores had a big ad for suede jackets and made much of the fact that they are “genuine pigskin.” So: inferior or not?--J.F.

A: “Inferior/superior” are all in the beholder’s eye when it comes to suede, and, while Rita Copelman, a spokeswoman for the trade group Leather Industries of America, in Washington, felt that “lambskin may be a little finer than pigskin, but they both clean equally well,” you won’t get that much of a concession (naturally) from Mike Simpson, president of the Pigskin Council in Des Moines, Iowa, which is a subsidiary of the National Pork Producers Assn.

“Lambskin,” Simpson says, “tends to be more expensive, but that’s strictly a matter of supply and demand.” There are more pigs running around out there than there are little lambs, in other words.

“But no suede is more supple, resilient or ‘breathes’ better than pigskin,” he adds. “You can get a pigskin suede jacket soaking wet, and when it dries out it’s just as soft and supple as it was before. It’s by far the most popular suede for athletic shoes, for instance. Cowhide suede, on the other hand, tends to dry out as stiff as a board.”

Although suede, Copelman says, is predominantly the underside of pig, cow or lamb hide--brushed to give it a soft finish--the suede finish, according to Simpson, has far more to do with the finishing process than it does with whether the hide is inside out.

The tricky part of suede, however (as you have discovered), is in the cleaning. Full-grain leather, in contrast, is a piece of cake. “A full-grain coat or jacket,” Simpson adds, “cleans up like a dirty shoe. It may be a hand process, but it’s still primarily a wiping job.”

What makes suede cleaning so tricky, Simpson says, “is that there’s no uniformity in the tanning process. Everybody does it differently and uses different chemicals.”

So, for the cleaner, it’s a matter of spot testing until he finds a cleaning solvent that’s compatible with the original tanning process. And the most common complaint has to do with retaining the original color--the jacket goes to the cleaner rust-colored and comes back pink.

A large part of your trouble, Simpson suggests diplomatically, may indeed have to do with the workmanship.

“She probably has a split-hide jacket, for one thing. The original hide may have been three layers thick, and the one she has, in all likelihood, is probably half that thick. That makes the cleaning of it that much trickier.”

Also related to workmanship, Simpson adds, is the common practice of using an adhesive--in addition to stitching--at the seams. Where corners have been cut in the manufacturing process, there’s a tendency to use a lot more adhesive in lieu of stitching, and, he continues, “you’ll find the seams coming apart in addition to the lumping she mentions.”

The consensus, then, seems to be that pigskin--although generally less expensive than lambskin--because of the demand-supply ratio--is not inherently inferior to lambskin or cowhide, but that a good part of your problem, if not all of it, may have to do with the workmanship.

“Fortunately,” as Simpson points out, “you don’t want to clean suede very frequently, anyway, because the varying shades of color in it are a real part of its appeal.”

Q: Can you stand another letter on accelerated mortgage payoff? Why make it so complicated? Why pay exactly the $11.56, which is the amount of the first additional principal payment, and so on, each month? You can pay any extra amount you want--more or less than the required principal payment--and it can be an even amount, too. Why not $12 or $20 or $50?

And, if your object is to reduce the span of the loan to exactly 15 years (and I don’t know what’s magic about 15 years), why not take a 15-year loan in the first place? The payments would be all figured out for you to begin with.--W.D.

A: “Another letter on accelerated mortgage payoff?” Yes, just about one more. Little did I suspect the flood of interest in the subject that one or two little columns would precipitate.

You’re quite right, of course. There isn’t really any point in making it so complicated--paying an uneven dollar figure (which changes every month) that represents the next month’s principal payment every time you make your regular payment. And, Kenneth Scott, president of Boston-based Financial Publishing Co., who devised the strategy, is the first to admit that it was, and is, primarily a gimmick to dramatize the impact that even a small accelerated mortgage payment has on the overall interest paid. You’ll have to admit that it’s pretty eye-opening to see in black and white that by paying just $11.56 (or whatever) extra on your 30-year mortgage early in the game you are shortening the life of that mortgage by one full month.

However, you’re right again--it’s a whale of a lot easier to settle on some flat dollar amount, over and above your regular monthly payment ($20, $30, $50 or whatever you can afford), and not worry about whether the regular 30-year payoff is reduced to a neat 15 years. There’s certainly nothing magical about 15 years. So it works out to 17 years and four months, or 18 years and one month, or 19 years and 11 months! You’ll still save a bundle on interest.

Yes, you’re right too that a 15-year mortgage in the first place (instead of 30 years) accomplishes the same thing--and, indeed, may result in a saving of one-half a percentage point, or so, on the interest rate as the lender’s reward to you for giving his money back faster.

The only real disadvantage to the 15-year mortgage (beside the fact that the monthly payments will, indeed, be somewhat higher than they would be for a 30-year mortgage--normally, about 15% higher) is that it locks you in, commits you, to this higher payment for the full 15 years. Adding a comparable, accelerated payment each month on a voluntary basis gives you the freedom to back off, and go back to your regular 30-year monthly payment, if--somewhere along the line--you get into a financial bind.

Don G. Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.