If you are hoping to be lucky enough to win the $550 million Powerball lottery jackpot, it might pay off to take a moment to consider the tax implications according to a financial law expert.
People who find themselves fortunate enough to win the jackpot will face a big decision, according to Private Client and Wealth Preservation Group Chair K. Eli Akhavan.
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Akhavan, who is also a partner at CKR Law in New York, reveals the winning ticket holder can either take the money as either a lump sum or a regular payment, which is transferred over the course of about 30 years. The regular payment, which is less common, includes an immediate amount plus 29 consecutive ones.
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The Powerball prize is touted to be the 10th largest lottery jackpot in U.S. history. The largest single-winner prize was the $1.6 billion Mega Millions jackpot, which an anonymous South Carolina resident claimed earlier this month. The individual reportedly decided for a lump sum payment of about $490.6 million.
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However, winners who take the prize in lump sum form will be hit with heavy taxes from authorities.
Akhavan claims the actual amount a winner takes home is much less than the headline jackpot number. He estimates the jackpot winner would receive about $335 million, from which 24 percent or $80.4 million would immediately be withheld to pay federal taxes.
The Internal Revenue Service (IRS) is also expected to dip into the winnings and slug the winner with the highest federal income bracket of 37 percent for individuals with incomes exceeding $500,000.
Any discrepancy between the 37 percent income tax rate and 24 percent federal withholding rate would also have to be paid when the winner files a tax return at the end of the year. Akhavan estimates this would be 13 percent or $43.5 million.
In addition to this, state taxes of up to 8.82 percent may apply depending on where the winner’s registered place of residence is. This would be as much as $29.5 million according to Akhavan. The winnings are not subject to the net investment income tax rate of 3.8 percent.
After all deductions, except for state taxes, the net winnings are estimated be just 38.4 percent of the total prize pool at $211 million.
However, if the winner decides to give the money away only, only amounts of up to $15,000 can be paid without bringing further tax penalties.
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Akhavan believes lottery winners can avoid unnecessary losses by hiring a legal representative to help manage their wealth.
“We hear all too often about lotto winners whose funds are mismanaged and they end up squandering their fortune,” he told Fox News. “A financial adviser should be selected to help prudently invest these assets … I frequently advise my clients on the use of sophisticated trusts and other techniques to ensure maximum protection.”
The Powerball lottery will be drawn on Wednesday, March 20. The odds of winning are less than one in 292 million.
