We all know money can’t buy happiness, blah, blah, blah. But money can buy a lot of other good stuff we all want – like comfort, security, freedom, and independence. So, last week, millions across America lined up at gas stations, convenience stores, and bodegas to take a shot at last week’s record Powerball jackpot of 588 million bucks.
Admit it – even if you didn’t play, you couldn’t help but dream at least a little about what you would do with all that money. That house you’ve always wanted on the most expensive street in town? The beach house or ski lodge you’ve always wanted to share with your friends? Lavish gifts for your family, favorite charities, and community? (It’s OK to dream just a little bit more before you finish reading.)
But here’s an ugly reality you probably don’t want to think about. No matter where you choose to spend your windfall, the biggest piece of all will go to your friends at the IRS. (Yes, those nice folks at the Multi-State Lottery Association will send the IRS a Form W-2G alerting them to your good fortune.) With jackpots this big, the tax collectors in Washington will probably put a plaque on the wall with your name on it!
Your first decision involves whether to take your prize in a lump sum this year, or an inflation-adjusted annuity over the next 30 years. And big decisions, as always, mean taking taxes into consideration. Taking your loot all at once means paying the top federal income tax rate of 35%. That may sound like a lot, but at least you’ll know exactly how much the tax will cost. Taking the prize in installments means paying whatever tax rate is in effect the year an installment is paid. Next year, for example, the Bush tax cuts are scheduled to expire, pushing the top tax rate to 39.6%. Next year also marks the first appearance of the Unearned Income Medicare Contribution, a 3.8% tax on “investment income” including annuities. And who knows what other new taxes might appear over the next 30 years?
Uncle Sam isn’t the only one who’s going to want a piece of your action. Forty-three states tax lottery winnings as ordinary income. Some states even tax your winnings if you just buy your ticket there without even living there. Do you live in Pennsylvania and work in New York? Don’t buy your ticket around the corner from the office unless you want to cut the Empire State in for 8.82%!
Of course, there are plenty of strategies you can use to offset the income from the prize. Do you own your own business? Consider establishing or beefing up your qualified retirement plan. Maybe a closely-held insurance company (CHIC) makes sense for even bigger savings. Are you charitably-inclined? You can offset up to 30% of your “adjusted gross income” with gifts to a private foundation and 50% for gifts to a “public” charity.
So, if you find yourself with a winning ticket, call us before you host that press conference and cash your ticket!
But if you don’t win that Powerball jackpot, good tax planning is even more important. That’s because you don’t have millions to waste on taxes you don’t have to pay! So call us anyway – and make sure you do it now before the New Year brings new taxes. And remember, we’re here for your family, friends, and colleagues, too!