By MARY DEIBEL
Scripps Howard News Service
February 23, 2006
Uncle Sam and Nebraska automatically withhold income tax so the winners from ConAgra's Lincoln, Neb., ham-packing plant each can expect to see $15.5 million after taxes - assuming they split their winnings equally.
By law, Nebraska withholds 5 percent state income tax and 25 percent federal income tax up front from lottery winnings of $5,000 or more. State authorities also check for back taxes and child support, both of which are subtracted from winnings, and Nebraska's tax collector will hunt down winning Cornhuskers who decide to take their lottery winnings and retire to Florida, where there is no state income tax.
A lottery winner's federal tax bill can go as high as the 35 percent tax bracket, depending on other income and the prize size, whether it's cash or cars, trips and other items taxed at fair-market value.
So whether you're one of the eight Nebraskans sharing Powerball's biggest prize ever, or one of 4,309,550 other players who'll share another $38.3 million from Saturday's Powerball drawing, you may owe quarterly estimated tax atop whatever the feds and your home state withhold, says editor Bob Scharin of RIA's Practical Tax Strategies, a tax journal for professionals.
Lottery winners get a W-2G form from the payer showing winnings paid during the tax year and the amount of tax withheld, according to the Internal Revenue Service. Amounts also get reported to the IRS, so don't think you can hide them: Payers also must record your Social Security number by law to cut you a check.
Nor is withholding the only taxing question for jackpot winners. Tax liability for lottery winnings also can depend on any agreement made with co-owners before learning you're a winner:
- If co-owners agree in advance on the split, the way the ConAgra workers say they always "pool" their ticket purchases, you only owe your share of taxes.
- If you're the lucky one who held the winning ticket, and cut in your less fortunate co-workers or family members who held losing tickets after the fact, you'll owe taxes on the full amount and could be subject to gift tax, too.
"There have been cases where one co-worker claims he bought the ticket himself and won't share, so it's worth making the office pact and writing it down in advance along with your lottery ticket numbers so there's no dispute between colleagues, the lottery and the IRS," Scharin says.
One last caveat: If you win a lottery that only pays yearly installments but assign your future payouts to an independent firm that will give you a lump-sum payment, it's treated as a taxable sale and ordinary income subject to tax rates up to 35 percent. That sale isn't a capital gain taxed at a maximum 15 percent rate, according to U.S. Tax Court rulings.
This isn't an issue for Powerball winners, who get a choice between 30-year installment payments and a lump-sum payout.
However, should you choose the installment payout and die before the full payout, your heirs could be hit with inheritance taxes, which are currently levied on estates worth more than $2 million this year, says financial planner Eric Tyson, co-author of "Taxes 2006 for Dummies."
Do note, Tyson adds: Gamblers can deduct their losses from any winnings, but only to the extent they exceed 2 percent of adjusted gross income.
So it's early enough in the 2006 tax year to save losing Powerball ticket stubs and payment receipts if you're a weekly player.
Winning numbers in Saturday's drawing were 15, 17, 43, 44 and 48, with the Powerball number 29, the Multi-State Lottery Association of Des Moines, Iowa, announced. It sells Powerball tickets in 28 states, the District of Columbia and the Virgin Islands, and rates the odds of any $1 Powerball ticket winning at 1 in 146,107,962.00.
The previous U.S. lottery jackpot record was $363 million for the Big Game.
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