Hopefully, if one of us is ever lucky enough to win a big lottery jackpot, we won’t care about how much of it we have to “share” with Uncle Sam as taxes. But winning any immense lottery jackpot, especially some of the recent Powerball or Mega-Million grand prizes, is likely to result in a considerable share for the Department of the Treasury. How much in tax would the IRS receive from a $500 million lotto winner?
First, the IRS automatically withholds 25% from large lottery payouts for some of the federal tax due. A taxpayer that refuses to supply a valid tax identification number will have 28% withheld. Thus, the amount has been reduced from $500 million to $375 million, assuming the taxpayer is cooperative and forthcoming about his or her social security or tax ID number.
A mere one million dollar jackpot pushes a taxpayer, at least for the year, into the top U.S. tax bracket of 39.6%. Consequently, another 14.6% tax, or $73 million, is owed to the U.S. Treasury, leaving a mere $302 million, out of the original $500 million in winnings.
But it’s not over yet, unless the lucky winner lives in Alaska, Florida, Nevada, Texas, South Dakota, Washington and Wyoming, one of the seven states that have no income tax, state income tax will exact further toll. Two states, Pennsylvania and California, in a surprising demonstration of legislative common sense, exempt lottery winnings from state income taxes. Interestingly, one minute the state is giving a winner his or her prize money, the next it is taking a little of it back…
Like the U.S. government, states with an income tax will also withhold part of the winnings. Grand prize lottery winners in New York will have to pay 8.82%, or a little more than $44 million, of a $500 million jackpot, reducing it to approximately $258 million (out of the $500 million) after federal taxes. Also, residents of the Big Apple should remember that New York City collects an additional 3.876% in taxes, which will take another $19 million, now leaving $239 million, or less than half of the original winnings. Ouch! But there is certainly a lesson to be learned about how full the glass still is from all of this.
Ergo, for a new York City resident, a $500 million winning is reduced to $239 million before the lucky winner can even get a dime of the winnings.
If you have questions about any type of gambling, lottery, or other gaming income, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
