Tax Planning for a Powerball Winner

Somebody will win the first powerball jackpot of 2016. The current estimated total from the powerball website is $1.4 billion as of this writing.  Whether it turns out to be a solo winner or the jackpot is split among multiple winners there will be some hefty taxes to be paid. You might say that no matter who wins the IRS is the biggest winner of the powerball since no matter when the pot is won the IRS always wins. It is nice to be the house.

How big is your tax bill if you are the single winner of the powerball? For starters, if you look at the powerball website, you will see just under that $1.4 billion estimated jackpot in a much smaller font the number $868 million cash value. But, is that number accurate?

Well that depends more on the state you live in. If you are lucky enough to live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming you will pay zero income taxes. Guess what? You will still owe the IRS another $22,340,926.00. That does not even take into account any other money you may have earned in the year before or after your claiming of the jackpot.

Of course, if you are not lucky enough to live in one of those states you will owe taxes to your state. If you are unfortunate enough to live in California where the top tax bracket for 2016 is 13.3%, you will owe an additional $186,200,000.00. OUCH! Since I am a resident of Missouri and if I won the powerball, my additional state tax bill would be less than half of a California winner at a mere $84,000,000.00.

As a tax planner and a believer in limited government I can tell you for certain I would not be happy dolling out such large sums of money to a government that returns me and the rest of the tax paying public which had been so kind as to participate in the building of my good fortune such a horrible return on those dollars. I believe those monies are always put to better use by my fellow citizens and their charitable endeavors.

When it comes right down to it for the wealthy and uber-wealthy, there are only three choices to make about where your money is going to end up anyway. The first is yourself and your now much larger family. Considering the extraordinary sum of money in the current jackpot this shouldn’t be a problem but an unbelievable percentage of lottery winners do end up going broke after a number of years.

The second choice is paying the money to the IRS. BOOH! (I could really expand on the evils of this choice but seeing as how I do not wish to end up on a no fly list and have many of my rights stripped in an unconstitutional over reach of government, I  won’t.)

The third choice is to give the money away to a fully accredited 501 c(3) charitable organization such as a church, homeless shelter, children’s hospital, medical research, feeding the needy, etc. It would probably be good financial planning to give to a homeless shelter since so many lottery winners do end up broke and losing their mansions to foreclosure. (I’m just saying.)

Now a lot of people who are not uber-wealthy would think that giving your money away is terrible advice. I even heard a financial planner say on an investment television show during the build up to a previous record breaking powerball jackpot that giving your money to charity is one of the worst things you can do especially in your first year. I could not disagree more.

Watch what the uber wealthy do with their money. Typically you do not want to listen to them. They often tell people to do the opposite of what they do. The super rich know the most important commodity wealth can buy is control and influence. They use charities to do this. Often they use their own charities.

The rich understand that when money goes to government they lose control. If they give money to a charity they retain much more control. They view it as cheaper, easier and more efficient to control a charity than to lobby the government. Not that lobbying government doesn’t pay it’s own dividends. Many and or most charities do some form of government lobbying.

Don’t believe me? Some of these uber wealthy influential people have their own charities named after them. Have you ever heard of the Bill and Melinda Gates Foundation? Not only does the B&M Foundation do some good work like provide vaccines to third world countries. They also lobby Congress about common core and education. Take a look at Project Veritas’ latest video on common core.

The rich will use their charities to influence government. That way they can lower their tax bill and help government on how to best decide how to spend their and your tax dollars. Now that’s a financial plan sure to warm the heart of even the most miserly, introverted billionaire.

So what happens when a powerball winner gives their money to charity. It does the same thing for the winner as it does for the well established billionaire on the Forbes 400. It gives the winner a tax deduction and a much better shot at having that money being spent wisely instead of on some tenured professor’s science project about whether shrimp are affected by environmental contaminants.

Let’s take a look at the math. After all your tax bill does all boil down to math.

If you are the sole winner of the powerball and live in a state like Missouri you are looking at a federal tax bill of $554,340,926.00 and a state tax bill of  $84,000,000.00. But what would your tax bill be if say you gave away $500,000,000.00? That’s a half billion dollars and I know it sounds insane but let’s dig into the math.

For a total contribution of $500,000,000.00 your federal tax bill becomes $372,973,645.00 and state tax bill becomes $56,518,276.00.  So between charities and taxes you are actually paying more out of your winnings and will have less cash in the bank. The upside is you have decreased the take of the IRS by $181,367,281.00 and the state by $27,481,724.00.

So here is the bottom line, you can pay as little as $638,340,926.00 in taxes to the IRS and state and keep $761,659,074.00 for yourself and any charities you decide to donate to in the future. Or, you can pay $429,491,921.00 in taxes to the IRS and state, give $500,000,000.00 and keep $470,508,079.00 for yourself.

So by paying out of pocket an extra $291,150,995.00 you have cut the governments control of $208,849,005.00 for which you will receive zero return. But for that extra $291 million you have considerable say in how and to whom you have benefited by a half billion dollars.

Which winner has benefited society more with their good fortune, the winner who paid the maximum tax bill and kept the most money, or the charitable winner who made headlines by giving away a half a billion dollars? For me I know it is the latter. Oh yeah, it would really give me a great amount of satisfaction to receive a refund check for $159,026,355.00.


About this Author 

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

About The Author

John Beidle

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.