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Powerball Winners Beware: Uncle Sam's Waiting For His Share
CCH Explains the Tax Consequences of Being Lucky
(RIVERWOODS, ILL., August 24, 2001) Winning Saturday nights $280 million
PowerballŪ jackpot certainly will bring you in touch with old friends and relatives, many
of whom you never knew you had. But you can be sure that first in line, ready to collect
his share of your winnings, will be some one very familiar to you Uncle Sam.
"While the odds are only one in 80 million to win the jackpot, the odds are 100
percent that youre going to have a hefty tax bill to pay on the proceeds," said
Mark Luscombe, JD, CPA and principal tax analyst for CCH INCORPORATED (CCH), a leading
provider of tax law information and software.
One of the first choices the winner is required to make within 60 days of
claiming the prize under current tax law is whether they want to take the lump-sum
cash option of $162.9 million or take the annuity option, which pays out the full amount
over 25 years.
From a tax standpoint, the benefit of the annuity is that it allows you to take
advantage of the lower tax brackets for declaring your winnings for each of the 25 years
you receive a payment, whereas if you choose the cash option, you can only take advantage
of the lower tax bracket in 2001.
However, if youre like most, youll choose the lump-sum cash option. In
which case, expect to hand over about $63.7 million to the IRS this year, assuming your
taxable income is only the cash-option lottery winnings. That leaves you with a little
over $99.2 million and thats before you pay any applicable state income
Still a nice chunk of change, but youll have to stay alive to benefit from it
fully. If you dont survive the shock of winning, youre looking at estate tax
rates of as high as 55 percent for 2001 on transfers in excess of the $675,000 estate tax
exclusion. If youre able to stave off death until 2010, your heirs will be much
better off as thats when the estate tax is scheduled to be repealed under the
Economic Growth and Tax Relief Reconciliation Act of 2001. But you dont want to wait
until 2011, because thats when the estate tax is scheduled to return.
If you survive the shock of winning, youll also continue paying more taxes as you
invest and spend the winnings over the years. The luxury tax will certainly hit you when
you go to replace the clunker in your garage with a vehicle more suitable to your new
position in life. For 2001, the luxury tax applies to cars that exceed $38,000. If you can
delay some of the purchases until after 2002, you could save on some of your winnings
since thats when the luxury tax is currently set to expire.
Despite your best efforts, its also likely that you wont be able to spend
all the cash in one year, meaning you can either put it under your mattress or invest it.
If your investments payoff, youll have to pay federal income tax each year on the
gains, unless youve invested in tax free bonds.
But Its Not All Taxes: The Deduction
If youre concerned that your winnings are quickly dwindling from all these taxes,
theres still hope, according to CCH. Gambling losses, including those from the
lottery, are tax deductible up to the amount of gambling winnings. So, if you spent $100
dollars this year on Powerball, and never won until you hit the jackpot, thats
deductible as a loss.
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has
served four generations of business professionals and their clients. The company produces
more than 700 electronic and print products for the tax, legal, securities, insurance,
human resources, health care and small business markets. CCH is a wholly owned subsidiary
of Wolters Kluwer North America. The CCH web site can be accessed at www.cch.com. The CCH Federal and State Tax
group web site can be accessed at http://tax.cchgroup.com.
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