Uncle Sam to be Sure Winner in Powerball Says CCH

CCH Outlines the Tax Consequences of Being Lucky

(RIVERWOODS, ILL., February 17, 2006) – While there’s no guarantee that anyone will win Saturday night’s Powerball® jackpot, already at a record $365 million, one thing is for certain – the eventual winner or winners will be sharing the wealth with Uncle Sam.

“The odds of winning the grand prize are less than one in 146 million, but it’s a sure bet that if you do win a big jackpot, you’re going to also have a big tax bill, with more than one-third of your winnings going to the IRS,” said Mark Luscombe, JD, CPA and principal tax analyst for CCH, a Wolters Kluwer business and a leading provider of tax law information and software (tax.cchgroup.com).

The first choice the winner needs to make – within 60 days of claiming the prize under current tax law – is whether he or she wants to take the lump-sum cash option, estimated at $177.3 million, or take the annuity option, which pays out the full amount over 29 years (30 payments).

From a tax standpoint it’s generally advisable to postpone any taxes you can to future years – which would make the annuity seem to be a better choice as you only are taxed on the income as you receive it. However, there are other personal finance matters to take into consideration, such as whether you think you can earn more on the lump sum over the next 29 years than the total annuity amount, keeping in mind that you do have to immediately pay all taxes on the lump sum whereas taxes on the annuity would be paid each year based on the amount of each payment.

Another consideration favoring lump sum is that the highest tax bracket today – 35 percent for taxable income of more than $336,550 for single or joint filers – is still pretty low compared to tax brackets of even just a few years ago. If you choose the annuity and tax rates increase, you’ll be paying more in taxes and chipping away more from your winnings.

So, if you do decide to take the lump sum this year, you can expect to hand over nearly $62.1 million to the IRS for the 2006 tax year, assuming your taxable income is only the cash-option lottery winnings. That leaves you with a little over $115.2 million – and that’s before you pay any applicable state income taxes.

Death Tax and Lottery Winnings

While you may be ecstatic about winning the lottery, one glum matter to consider is your death. If the shock of winning is heart-stopping, you’re looking at estate tax rates of as high as 46 percent for 2006 on transfers in excess of the $2 million estate tax exclusion. If you’re able to keep death at bay until 2010, your heirs will be much better off as that’s when the estate tax is scheduled to be repealed under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). But you don’t want to wait until 2011, because that’s when the estate tax is scheduled to return at the pre-EGTRRA level of at least 55 percent for transfers in excess of $3 million.

Live and be Taxed

Should you survive and go on to invest part of your winnings over the years, you’ll have to pay federal income tax each year on the gains, assuming your investments pay off and you don’t invest all in tax-free bonds.

The good news – at least for now – is that, like the taxable income rates, capital gains rates also are relatively low, with the maximum capital gains tax rate of 15 percent for 2006.

And, if any of your investments go south, you can always use your investment losses to offset gains. Also, up to $3,000 of net capital losses can be used in 2006 to offset other income; any additional losses can be carried forward until the entire loss is used up.

But it’s Not All Taxes: There’s a Pretty Sure Deduction

If you’re concerned that your winnings are quickly dwindling from all these taxes, there’s one final deduction you may be eligible for, according to CCH: gambling losses.

Gambling losses, including those from the lottery, are tax deductible up to the amount of gambling winnings. So, if you spent $200 dollars this year on Powerball, and never won until you hit the jackpot, that’s deductible as an itemized deduction.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research Network™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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