Gambling is an old practice that has always come with its fair share of risks. Anyone that is looking to take home big winnings from the lottery, horse races or casinos potentially stands to lose money in the process. However, if you do hit it big and win a considerable amount, you have another problem to worry about: taxes. The most recent Powerball went to a single ticket holder in Florida. That person won approximately $590 million. With new tax rates in place, this lucky individual will be paying more to the federal government than they would have in 2012.
Tax rates change quite frequently and this year’s increase is no exception to the rule. The percentage of income that is taken as taxes, percentage-wise, is tied to the brackets that are designed to separate groups based on the amount a taxpayer (or couple) brings in annually. For those in the top tax bracket, the federal government taxes income at 39.6%. On almost $600 million, this comes out to roughly $234,000,000.
While $366 million still sounds like a great amount of money, the situation is a little more complicated. A winner can choose to receive their money over a course of 30 years or take a single payment. Either way, the tax rate will be the same, but choosing the single payment means you actually only receive less than $400 million that can be taxed because of anticipated decreases in the dollar’s worth. If they take the yearly option, the taxes would come out to around $8,000,000 for each installment. None of this takes into account the potential state tax (although if the winner is a Florida resident, they will luck out again as it is one of the states that has no income tax).
The people behind the Powerball simplify the tax issue a bit by setting aside 25% of a jackpot above a certain threshold. This doesn’t settle the entire balance, leaving approximately 15% to pay when tax time comes, but it does ease the pain a bit in April. Tax professionals recommend anyone that receives winnings from gambling of any kind use their services to ensure they remain compliant to IRS and State tax agencies. If the IRS doesn’t get their money, the blessings of large winnings can turn into a curse as interest and penalties take a significant chunk of an individual’s newly found nest egg. Call a tax expert for more information on taxes and gambling.