Win the Powerball Lottery and Prepare for a Huge Tax Bill

Powerball Lottery Ticket With the Powerball lottery expecting to pass $1.7 Billion ($1,700,000,000.00) everyone is talking about how they are going to give away $1 Million to a lot of their friends. Be careful with how many you give this to, as you will trigger a huge gift tax penalty (yes, I say penalty which I believe should not be there) of an additional tax of 40%.

Let’s take a look at the taxes on a Powerball win. First a $1.7 Billion win translates to $1,054,000,000 if you take the lump sum payout. I don’t know anyone willing to wait 39 years for 40 Powerball payments (or expects to live that long) to get the full amount.

Take that lump sum Powerball check and you will owe the IRS around 40% in taxes on that amount, and you have to declare the full amount on your income tax filing before giving away a lot of gifts. Most of your gifts will not be tax deductible anyway. So, after the IRS gets their money you are left with $632 Million, which is still a serious chunk of change.

State taxes vary considerably, but if you live in California, Delaware, Florida, New Hampshire, Pennsylvania, Puerto Rico, South Dakota, Tennessee, Texas or Wyoming at the time you win (not claim) the Powerball fortune, you will not have to pay any state taxes. Some states will only exempt you from Powerball taxes if you purchase the ticket in that state.

So, before you plan on spending any money, or giving it away, set aside the rest of your 40% federal taxes (the IRS only withholds 25%) and any state taxes. Write checks to the full amount owed to the IRS and state to avoid any possibility of fines for withholding too little from your Powerball winnings.

If you are unlucky enough to live in New York City, Write a checks for total of $133,815,840 in State and City taxes, leaving you with slightly under half a billion dollars ($498,184,160).

Immediately see a tax accountant and a tax attorney to develop a strategy of giving to maximize your gifts and minimize the additional cut the IRS will take. Yes, you are not yet done with the IRS quite yet.

Gifts to legitimate charities and churches are tax deductible, so if you tithe (on the Powerball pre-tax amount) you will get a $63,200,000 deduction on your tax return. Be really careful when you give gifts to individuals. You are limited to a maximum of $14,000. IF YOU DONATE MORE, YOU MAY WIND UP PAYING AN ADDITIONAL 40% ON THE GIFT. The IRS states:

The annual exclusion for 2014, 2015, and 2016 is $14,000.

Double that if you are married. Now, if you gift in excess of that to an individual (including your children), you start eating away at the lifetime exclusion of $5.45 Million. So if 5 friends are lucky to get a million dollars of your Powerball winnings, you will not have to shell out any more money to the IRS. Any amount you give to people that exceeds your lifetime limit will cost you an additional 40% in taxes, even though you have already paid federal taxes on your original Powerball winnings.

On the bright side, no gift taxes are due if you pay someone’s medical bills (maybe $1 million to $2 million for a liver transplant) of provide for education (all your nieces, nephews, grandkids or great grandkids.

See your accountant and start helping people!

What will you do if you win the Powerball, Megabucks, Super Lotto or other Lotto game?

 

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