What Kind of Taxes Would You Pay on a 1.4 Billion Dollar Jackpot?
Do you have your next round of tickets yet for Wednesday nights estimated 1.4 BILLION dollar Powerball jackpot?
Let me guess, not only have purchased your tickets, you've already started dreaming of ways to spend some of the money, right?
Well hold on there for a second Mr. or Mrs. Powerball winner, Uncle Sam wants his cut first.
Have you heard how much the feds plans on taking right off the top, right after you win? It's eye opening to say the least.
Let's say you do win the big Powerball jackpot on Wednesday night. Here are the taxes you can expect to pay right away.
First off, you only get the estimated 1.4 billion dollar prize if you opt to take the winnings in 30 payments over 29 years. If you want the money now in one lump sum, the jackpot is a measly $868 million, a cut of 38 percent.
Then comes the federal tax bill. Lottery winnings are taxed as ordinary income. If you win the jackpot, you'll be subject to the highest federal tax rate of 39.6 percent.
The U.S. Government automatically withholds 25 percent of large prizes if the winner is a citizen or resident with a Social Security number. For someone choosing the lump sum, that reduces take-home winnings by $217 million.
If you're a resident who doesn't have a Social Security number, or fails to provide one, they will sock you for 28 percent withheld and foreigners, get to pay a 30 percent tax.
But wait, there's more. Winners will then have to cough up the remaining 14.6 percent in federal taxes come tax time in April 2017. That's an additional $126.7 million bill that you will need to account for next year. So don't start spending all your money too soon!
So after Uncle Sam takes his entire share, you'll be left with about $524.3 million.
Get ready for that pile of cash to get even smaller depending on where you live and where you bought your ticket. Certain states will require you to pay state and local income taxes.
A state and local tax bill could shave as much as another 15 percent, roughly $130.2 million off the top of a lump sum. That further reduces your net winnings to as little as $394.1 million. Keep in mind, those taxes may not be withheld, so factor that in as another tax bill come due next April.
Actually living in South Dakota works in your favor. If you are a resident in South Dakota or in states like; Alaska, Florida, New Hampshire, Tennessee, Texas, Washington and Wyoming. We all participate in Powerball but do not have a personal income tax.
California and Pennsylvania are also exempt from state income tax regarding lottery winnings if you bought the ticket in state, according to lottery information site USAMega.com.
Now here comes the really fun part. Let's say you win and feel like being really generous with all that money. Get ready for the gift tax rules to kick in.
The IRS allows you to gift up to $14,000 per recipient each year, tax-free, with bigger gifts eating away at your lifetime exemption of $5.45 million. Gifts to a spouse however are unlimited. Exceed that, and the gift tax is a flat 40 percent.
Giving to charity in the year of your win could help. Even if you immediately make a big donation, you'll still have to claim the full prize as income. The IRS will generally allow you to claim donations worth up to 50 percent of your adjusted gross income as a deduction, with excess carried over for up to five years; even donating the maximum deductible amount of $434 million, your federal tax bill next year would still be more than $171.8 million.
Basically what it all boils down to, should you win this record high jackpot on Wednesday night, get yourself a lawyer and a qualified tax planner after you win but before you claim the prize money publicly. You'll definitely want to devise the best game plan possible on what to do with all the money.
Oh yeah, and please don't forget about the guy that gave you all this sage advice.