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Powerball Lottery Winner to Pay over $150 Million in Taxes

One or more individuals are likely still reeling this morning at having purchased the winning lottery ticket in the Powerball jackpot this past Saturday night.  They can also expect to reel when they receive the tax bill from the IRS.

The Powerball jackpot on Saturday was for an estimated $590.5 million.  A single winning ticket was purchased at a Publix supermarket in Zephyrhills, Florida, a small town approximately 30 miles northeast of Tampa.

The winner has not yet come forward to collect the lottery winnings.  He has 60 days to claim the winnings.

The winner can elect to receive the winnings in installment payments over the next 30 years or as a lump sum cash amount of approximately $376.9 million.  Either way, the IRS will take their fair share through several different tax avenues.

For purposes of this article, let us assume the winner is one person and they elect to receive the lump sum cash payment (although in the end the tax calculation for the installment payments would be roughly the same).

When the person receives the $376.9 million lump sum cash payment, they will fall into the highest federal income tax bracket of 39.6%.  This means his initial federal income tax bill will be roughly $149.25 million, leaving him with approximately $227.6 million after taxes ($376.9 x (100% – 39.6%).

Florida is one of six states (along with New Hampshire, South Dakota, Tennessee, Texas, and Washington) that participate in the Powerball lottery that do not impose state income tax on lottery winnings.

Seven states do not participate in the Powerball lottery, including Alabama, Alaska, Hawaii, Mississippi, Nevada, Utah, and Wyoming.  Lottery winners in the following states would pay state and city taxes as follows:

State

Tax Rate

Arizona

5.00% (residents); 6.00% (non-residents)

Arkansas

7.00%

Colorado

4.00%

Connecticut

6.70%

District of Columbia

8.50%

Georgia

6.00%

Idaho

7.80%

Illinois

5.00%

Indiana

3.40%

Iowa

5.00%

Kansas

5.00%

Kentucky

6.00%

Louisiana

5.00%

Maine

5.00%

Maryland

9.25% (residents); 7.5% (non-residents)

Michigan

4.35%

Minnesota

7.25%

Missouri

4.00%

Montana

6.90%

Nebraska

5.00%

New Jersey

10.80%

New Mexico

6.00%

New York

8.97% (plus 3.648% in New York City and 0.897% for Yonkers)

North Carolina

7.00%

North Dakota

5.54%

Ohio

6.00%

Oklahoma

4.00%

Oregon

8.00%

Rhode Island

7.00%

South Carolina

7.00%

Vermont

6.00%

Virginia

4.00%

West Virginia

6.50%

Wisconsin

7.75%

If the winner chooses to give some of his winnings to family or friends, he as the donor, not the recipient of the gift, will pay the gift tax.  For 2013, the annual exclusion amount from gift tax is $14,000 per individual.  Alternatively, the lifetime exemption amount from paying gift tax for a donor is $5.25 million.

If the winner is generous enough to give more than $5.25 million away to family and friends, he will pay gift tax of 40% on each dollar given away above that amount to non-charitable or political organizations.

Throughout the winner’s life, he will of course pay sales tax on items he purchases.  The general sales tax rate in Florida is 6%.  This means that for each $1 million in purchases he makes, he will pay $60,000 in sales tax.

Finally, there is ultimately the estate tax, or death tax, to consider.  At the time of the winner’ death, if he has not already given away in excess of the $5.25 million lifetime gift tax exemption amount, his gross estate will be assessed the 40% tax rate on remaining assets above the $5.25 million exemption amount.

While the winner of the latest Powerball lottery has more than enough winnings to last several lifetimes, the government takes its fair share through income, gift, sales, and estate taxes.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.

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