By A.J. Gross
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.
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.
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.
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.
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. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@
This article was printed in the January 24, 2016 - February 6, 2016 edition.