Did you buy a Powerball ticket when the jackpot was an estimated $1.5B? I sure did. Like most people, I figured out how to spend the money: retire immediately, new house, new car, exotic vacations, and financially help close family and friends. In my head, I was set for life and it felt good. Until I found out I didn’t win. Well, I knew I wasn’t going to win but it was fun to dream about it.
Lump Sum Payout – $930 million
After Federal Income Tax – $561.7 million
As a tax professional, I started to think about the tax implications if I won. The first tax to consider is federal income tax. The estimated lump sum payout was $930 million. The lottery will automatically withhold 25% from the winnings. 25% of $930 million is $232.5 million. This means the lottery will write a check for $697.5 million. But the $232.5 million withheld from the winnings doesn’t cover all federal income taxes. When the tax return is filed, the lottery winnings will be taxed at around 39.6%. In addition to the $232.5 million withheld from the winnings, $135.8 million in federal income taxes will be owed. After Uncle Sam gets his share you are left with $561.7 million.
After Michigan Income Tax – $522.2 million
The next tax is Michigan income tax. The Michigan income tax rate is 4.25%. The Michigan income tax on $930 million of winnings is $39.5 million. The remaining amount of the winnings is $522.2 million.
After Lansing Income Tax – $512.9 million
You can’t forget about Lansing income tax. The Lansing income tax rate is 1%. The Lansing income tax on $930 million of winnings is $9.3 million. The remaining amount left is now $512.9 million.
After Gift Tax – Depends
The last tax most people may not consider is gift tax. There are two main gift tax rules. First rule, you are able to gift $14,000 annually to anybody and not be required to report the gift to the IRS. If you are married, you can double the amount to $28,000. Second rule, the lifetime exclusion for non-taxable estate and gift tax is $5,450,000. This amount is doubled if you are married. The second rule means you can provide up to $5,540,000 of non-taxable gifts. Once the value of lifetime gifts exceeds $5,450,000, all subsequent gifts are taxed at 40%. In other words, if the winner of the Powerball decides to gives away $20 million to family and friends, the taxes owed for this gift will be about $5.8 million. I bet the winner will think twice before exceeding the gift tax exclusion amount.
After writing this article, I can’t help to think of the old saying “Nothing is certain but death and taxes.”
A.J. Gross, C.P.A., E.A.
President of ALG Tax Solutions.