January 2. 2013 | Cortney Barry
Winning the Lottery, Losing in Taxes
Two lucky winners in Arizona and Missouri have claimed their share of the record-shattering $580 million Powerball jackpot after the recent drawing. Sounds like a pretty good payday to me. But even though they are lucky enough to beat the statistics of “things that are more likely than winning the Powerball jackpot,” such as birthing identical quadruplets or becoming president, they will not be so lucky when it comes to their tax bills.
With so much left undecided and little progress made on the so-called “fiscal cliff,” these lottery winners hopefully checked with professionals, like us, before claiming their winnings and deciding how to receive their payout. These two people will undoubtedly have hefty tax obligations, but the key is determining the best strategy to minimize their liability. Depending on the resolution that U.S. lawmakers eventually reach, tax liabilities could potentially increase for 88 percent of U.S. taxpayers.
If our nation is to “fall” off the fiscal cliff, prompting higher income tax rates, these winners may want to cash in their winnings in 2012 to avoid these potential increases in 2013. While it’s generally advisable to postpone any taxes to later years when feasible, that is not typically the case for lottery winnings, and especially not this year. The highest tax bracket of 35 percent is set to increase to 39.6 percent in 2013. If Congress does not act, this tax year might be a more beneficial time to claim, because lottery winnings are typically taxed in the year in which they are received.
Other considerations include state and local taxes, estate taxes, and capital gains rates. If the shock of winning causes a heart attack (God forbid), the winner’s family members would be faced with a gift tax rate of 35 percent and $5.12 million exemption for 2012, with a potential increase to 55 percent and decrease to $1 million in 2013. State and local taxes will slash the payout even further, and investing will get significantly more costly after this fiscal cliff. So much for investing and growing this extremely rare occurring income! Winners will likely pay increased capital gains rates as well on their investments in the coming years.
With the help of well-educated professionals, these lucky winners can consider all of their options and better understand the tax implications of different decisions. There’s nothing like someone reaping wealth by the virtue of pure luck and then blowing it all away!
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