It’s all over the news; Powerball is currently the largest lottery jackpot in history, roughly $600 million greater than the previous world-record jackpot. You knew it was going to happen – you won! $1.5 billion dollars. You have new friends and family you never knew existed. What do you do now?
You may be thinking with over a billion dollars, you and your family will never have to worry about anything again! But, you may have some new worries. You also have partners you never knew about. Namely, your friendly tax collectors. Once you go to claim that prize, new stress begins.
Prize Money is Still Income
Although it may seem like a blessing, winning a lottery can be a tax headache, so there are a lot of things to consider before you cash out. Although a handful of states are exempt from taxes on lottery winnings, the IRS isn’t. Lottery winnings are taxed like income, and the IRS taxes the top income bracket 39.6%. Opt for the lump sum instead of a long term payout and Powerball will award the jackpot’s “cash value” of about $930 million. That means the recipient pays the income tax on that amount up front. The government will withhold 25% before the money ever gets to the winner. The rest at tax time. Please don’t win in New York State; they withhold about 8.8%. New York City? 3.9%. Yonkers too? Withholdings at 1.5%.
Any Tax Planning Available?
You can start with gifts to charity. However, even if a winner gives all winnings to charity he or she may still end up with a big tax bill. Charitable contribution tax deductions are usually limited to 50% of your income and in some cases less. So, even if a winner gives all the money to charity, they still might have to pay tax on half. You might also consider gifting some of the money to family and friends, but you’ll need a lot of them. To avoid a gift tax, gifts generally can’t exceed the annual exclusion amount, currently $14,000 per person. You may gain some tax advantage by holding your lottery winnings in a trust. This may avoid probate of lottery proceeds when you die, minimizing taxes on your estate.
So, before you claim your prize, talk to a tax pro. You have options. You have the choice between taking the prize money all at once or having it paid out in 30 installments over 29 years, as an annuity. With a lump sum payment, you must immediately pay tax on the entire amount, and with an annuity, you are taxed as you receive the payments. But, many pros say you do better taking the lump sum and investing it, even after taxes.
Lots to think about but you have 60 days from the date of the drawing to decide, so be sure to think carefully.
Our office would be happy to help you with any tax advice that you may need. And remember, professional advice is generally deductible!
This summary in not intended to be, nor can it be relied upon, as guidance on any tax matter and is for informational purposes only. The reader is advised to consult with their own tax advisor for guidance on anything contained in this document.