Win the Jackpot to Get the Scraps – Welcome to Lottery Taxation Horror Stories

Things Don’t Look Too Rosy When It Comes to Lottery Taxation

Let’s say you’ve finally won the millions that you’ve been hoping for all your life. You’re already dreaming about the mansion, the yacht and the journey across the world that you’re going to take. Not so fast! Before thinking about how you’re going to spend all that money, you’ll need to factor a major (horrifying) component. That’s right, TAXES!

The chances are that you’ll have to hand over a couple of million to the federal government, local taxation and city authorities. Sure, you’ll still be left with lots of money, right? Well, someone has already done the calculations, and things don’t look too rosy when it comes to lottery taxation.

So, How Much Does the State Want?

Lottery taxation varies significantly from state to state. If you’re this keen on winning the lottery, you may consider relocating right now! This is especially true for the people living in a place where double taxation occurs.

Lottery taxes themselves are pretty diversified.

The lottery tax ranges from 3.4 percent in Indiana; four percent in Colorado, Missouri, Oklahoma, and Virginia; around six percent in Arizona, Georgia, Kentucky, Montana, and New Mexico to as much as 10 percent and more in New Jersey and Maryland.

Lottery revenue does contribute to a large lump amount added to the budget, which is why so many states have additional taxes on top of income taxation. The implicit state revenue per capita from lottery earnings ranges from as little as 24 dollars in Kansas to the impressive 314 dollars per person in West Virginia, Tax Foundation reports.

So, winning the lottery may not feel like the greatest thing in the world anymore, right? But wait, there is more! Double lottery taxation exists in certain parts of the country, which will contribute to the feeling of being ripped off even further. We’ll now give you a basic example and do the math together to figure out exactly how much of the coveted jackpot you’ll be handing over.

No Mercy – Can’t Run from the Taxes

Forbes magazine did a basic calculation to figure out how the double lottery taxation can affect the winner of the Powerball jackpot.

Say that the jackpot in question is 640 million dollars. A winner that decides to take the money as a lump sum during the year (because who wouldn’t, right?) will receive 462 million dollars out of the 640 million. Why? We’re glad you’ve asked, and the answer is simple – taking the lump sum rather than getting the money over an extended period comes with its downsides. The biggest downside is called federal withholding tax.

Only five of the states don’t have an income tax. These states include Tennessee, Texas, Washington, New Hampshire, and South Dakota. Everywhere else, winners will have to dedicate a large sum (up to 35 percent) of the amount to Uncle Sam. To make the heartbreaking calculation – 35 percent of 462 million dollars is 161.7 million dollars. This will leave a jackpot of 300.3 million dollars to the winner.

Think we’re done? Not so fast!

Lottery taxation can get even trickier. Local taxes have to be taken into consideration, as well. People living in New York City, for example, will still need to dedicate 8.82 percent of the jackpot to state tax and 3.87 percent to city tax. We’re pouring salt on the wound right now, but this additional lottery taxation will bring the sum down even further. So, instead of getting 300.3 million after taxes, a New York City resident will end up getting 199.5 million from the 640 million dollar jackpot. Quite depressing, right?

Lawyer Up!

Naturally, the example provided is an over-simplification, and it presents a worst-case scenario. Lottery taxes can be much smaller in other parts of the country, especially if double taxation gets avoided.

It’s essential to keep in mind that even if you plan to dedicate a large amount of the money to charity, you’ll still owe taxes.

The best thing you can do is lawyer up right after winning the lottery. A lawyer that specializes in income taxes can give you the right advice and help you figure out how much of the money you’ll have to hand over to federal and local authorities.

In essence, tax planning for lottery winners feels like the morning after – it certainly isn’t fun, but it can prevent a major disaster in the future.

It’s particularly important to talk to an advisor or a professional that specializes in lottery taxation if you plan to share the earnings with family members. In this instance, you’ll probably have to deal with a 35 percent federal gift tax (yes, it’s a real thing, and we didn’t make it up). The tax applies to sums over 14,000 dollars given to one individual over one year.

When lawyering up, don’t commit the mistake that Tonda Lynn Dickerson made. Tonda received a lottery ticket as a tip, and it happened to bring her winnings of 10 million dollars. Consulting her father, who worked as an attorney, Tonda decided to form the S Corporation as an option for holding the lottery winnings. The idea was to protect the 10 million from potential creditors. The big problem was that Tonda was handed a bill for unpaid gift taxes totaling 771,570 dollars because 51 percent of the company’s stocks belonged to her relatives. Naturally, Tonda disagreed and challenged the IRS, saying that she hadn’t made a gift but that a contract was in place.

The court, however, didn’t dig her argument and many years after the beginning of the saga, it declared that the amount was indeed a gift. The lesson to learn from the story? When choosing an attorney, make sure that the person knows what they’re doing. Otherwise, you risk waving your lottery jackpot millions goodbye.