PUBLISHED WED, JAN 8 2020 9:00 AM EST UPDATED THU, JAN 9
2020 6:46 PM EST
KEY
POINTS
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The 24% federal tax withholding would reduce the jackpot’s
$188.4 million cash option by $45.2 million.
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The winner would likely owe more to the IRS, as well as to state
coffers.
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Last year, Powerball and Mega Millions each had seven jackpots
won throughout the year, worth an advertised $3.8 billion in all.
With no one hitting all six winning numbers in
Powerball’s Wednesday night drawing, the jackpot has pushed higher again.
The top prize is now at an advertised $277
million for the drawing on Saturday. If you’re lucky enough to win, remember
that the IRS gets an up-front piece of big lottery wins. And that tax
withholding wouldn’t be the end of it.
“There is still a sizable tax bill coming, for
sure,” said April Walker, lead manager for tax practice and ethics at the
American Institute of CPAs. “Winners have to plan for any additional amount
that will be due ... to the IRS and the state.”
Whether you take the jackpot as an annuity
spread across three decades or as an immediate, reduced lump sum, 24% is
withheld for federal taxes. However, the current top marginal rate of 37% would
mean owing a lot more.
For Saturday night’s jackpot drawing, the cash
option — which most winners go with — is $188.4 million. The 24% federal
withholding would reduce that amount by $45.2 million, leaving you with $143.2
million.
Assuming you had no reductions to your taxable income
— such as large charitable contributions — another 13%, or $24.5 million, would
be due to the IRS at tax time (which would be April 2021 for jackpots claimed
in 2020).
That would be $69.7 million in all going to
Uncle Sam, leaving you with a cool $118.7 million.
However, state or local taxes would be on top of
that. Those levies range from zero to more than 8%, depending on where the
ticket was purchased and where the winner lives. In other words, you could end
up paying more than 45% in taxes.
And, like the federal withholding rate on
jackpot wins, the amount withheld for state taxes might also be less than what
you’ll owe.
“They might withhold at, say, 5%, but the rate
you pay might be 6%,” Walker said.
There are ways to reduce the amount of winnings
that gets taxed, although not many.
The charitably inclined can lower their taxable
income by making a cash donation of up to 60% of their adjusted gross income
and carry forward, up to five years, any excess amount.
Some lottery winners set up their own charitable
foundation or similar option, such as a donor-advised fund, and donate a
portion of their windfall to it.
“That would be a way to direct charitable
contributions over a period of time but take the deduction [for the current tax
year],” Walker said.
Despite forking over a hefty amount to federal
and state coffers, the after-tax amount would likely be life-changing. Experts
say jackpot winners should assemble a team of experienced professionals — an
attorney, a tax advisor and a financial advisor — to help navigate their sudden
wealth.
In 2019, Powerball and Mega Millions each had
seven jackpots won throughout the year, worth an advertised $3.8 billion in
all.
Excluding two jackpots that remain unclaimed,
all winners chose the cash option — collectively about $2.06 billion — instead
of an annuity. In total, roughly $505.5 million was withheld in federal taxes.
Your chance of winning the Powerball jackpot is
about 1 in 292 million. For Mega Millions, it’s roughly 1 in 302 million.
https://www.cnbc.com/2020/01/08/powerball-jackpot-heres-the-tax-bite-if-theres-a-winner.html?recirc=taboolainternal
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