The $1.6 billion Mega Millions and $620 million Powerball jackpots have prompted even the most causal of lottery players to jump in and give it a shot. Regardless of who won, the fact is that the federal government is going to get a sizable chunk of the winnings.
This prompts us to remind folks that it always a good idea to consult with a financial law attorney as well as other financial advisors to avoid overpaying one’s tax obligations, particularly when there is a major windfall. This is applicable to jackpot winners, those who won big bucks in Las Vegas or somehow came into a large amount of money in a lump sum or an annuity spread over several decades.
The bad news
The tax bite starts before the winner ever sees that check with 24 percent taken off the top for federal tax withholding. The rate of 37 percent applies to the adjusted gross income of $500,000 or more. That other 13 percent must be paid when tax time rolls around. This does not include the 4 percent cut the state of Ohio gets. Depending on which state you live in — North Dakota has a rate of 2.4 percent and New York has one of 8.8 percent – the total tax obligation could be as high as 45 percent of the total.
Lowering the obligation through deductions
There are a number of different deductions that can count against a windfall, including gambling losses. Other common deductions for itemized tax filers include amounts for the following:
It is complicated
The state and federal tax systems are extremely complicated and change over time. Those benefitting from lottery wins and other major windfalls are advised to speak with an attorney who can help them map out or update strategies for taxes and gifts as well as estate planning.
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