Your Plans for the $1.5 Billion Powerball Winnings

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.

Lump Sum Payout – $930 million

After Federal Income Tax – $561.7 million

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.

After Michigan Income Tax – $522.2 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.

After Lansing Income Tax – $512.9 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.

After Gift Tax – Depends

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.
President of ALG Tax Solutions.