You just won the $1.5 billion Powerball lottery…. After that sinks in for a minute, you start wondering how much cash you will really get. Unfortunately, it won’t be anywhere close to $1.5.
Assuming you want to take the lump sum, that’s a 38% reduction, and your payout would be about $930 million. But Uncle Sam will come asking for his share. Lottery winnings are taxed as ordinary income. That much income will be taxed at the highest tax rate of 39.6%. Here, in the state of Georgia, the tax rate is 6%. So while you’re stroking that $367.35 million dollar check to the IRS, just go ahead and whip one out one to the Georgia Department of Revenue for about $55.8 million. Essentially your winnings will be cut down to just a third and you will have to make do with a mere $508 million. It’ll be tough.
But, wait. You know your phone is going to start ringing. Every family member and friend you never knew you had will be banking on your generosity. Triggering the gift tax is extremely easy to do with this amount of money. The IRS allows you to gift up to $14,000 per year to any one individual with a total lifetime limit of $5.45 million to all recipients. Exceed that and the gift tax, which you would pay, is a flat 40%. So, if you’re thinking about giving good old Aunt Martha $50 million to build her dolphin sanctuary off the coast of Bermuda. You should know this will run you an extra $20 million in taxes. That will bring your total cash out pocket up to $70 million. But I’m sure Aunt Martha is worth it.
You can give some of the income to a charity. The IRS allows you to deduct up to 50% of your annual income to a qualified charity, with the excess carried forward for up to 5 years. This means you could give up to $465 million to your favorite organization. But your federal tax bill would still be over $184 million.
It’s fun to dream about having this amount of income. I hope that it may come true for one or many of you. But the odds of winning this Powerball are one in $292.2 million. So while you may not actually need tax planning to handle your lottery winnings. You may have other unexpected life events that do. You may have received an unexpected 1099 or inheritance. Maybe you purchased or sold your home. Maybe you started your own business. Any of the scenarios can have tax consequences. If you are unsure, we are here to help…we only ask that you bring Preacher a really big bone. You’re a millionaire now, you can afford it!