The recent Powerball lottery drawing for $564 million produced winners in North Carolina, Texas, and Puerto Rico. The huge jackpot aroused a lot of interest, and it will generate tax revenue yet to be determined. Tax attorney Rob Wood discusses the tax issues in this report which was also the subject of his Forbes article “3 Winning Tickets In $564 Million Powerball, Less After Tax, Claims, Family.”
Wood points out that an individual’s total tax liability will depend on the individual’s state of residence. The IRS will, of course, collect federal income tax from the winners. Most states also tax lottery winnings, and the general rule is that every U.S. citizen is a resident of a state.
Most lottery winners take lump sum distributions. However, taking an annuity may well be a good—or even better—choice. Software like TurboTax permits a winner to examine the tax consequences of taking the lump sum as compared with taking a twenty-year annuity. Wood notes that the current low interest rates are not favorable to annuity earnings, but spreading the income out over a period of years means that a winner will actually get more money. Also, receiving the money over time builds in a certain savings factor and a protection from a winner’s improvident spending. It is also an insulation against relatives and friends who sometimes help a winner dissipate the winnings.
Wood says that anyone who wins a lottery becomes a target for all kinds of people and causes, all seeking a slice of the money. The publicity associated with winning a lottery does a lot to expose winners to being approached for money. Also, winners are sometimes approached by family members they didn’t know they had.
There can also be controversy over who is entitled to the proceeds. Co-workers may remember that a group of employees all agreed to go in on buying a ticket and may demand a share. Also, there can be gift tax consequences of giving part of your winnings to family members, as in Dickerson v. Commissioner. Wood urges any lottery winner to consult a tax expert before giving away money to friends, family, or charity.
As to the winner in Puerto Rico, Wood says the tax situation in Puerto Rico is both confusing and alluring. Puerto Rico is a protectorate, not a state. Federal taxes are not paid to the IRS. Again, Wood urges anyone considering a move to Puerto Rico to get some tax advice before making the move and to visit the island to be sure that it is a place you would want to live.
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.