With all the recent Powerball Lotto excitement the question some potential billionaires are astutely asking is what the tax implications are when they win their fortunes.
While lotto winners reap considerable rewards, the federal government is also a big winner. With a current top tax bracket of 39.6% the federal government’s take is not insubstantial. However, where lottery winners err is that only 25% of the jackpot is withheld for taxes on the initial payout. Many incorrectly assume that the 25% withholding is the extent of the federal income tax liability, but that is only a partial payment. Another 14.6% may be due when the winner’s income tax return is filed!
Fortunately, though, California is indeed the Golden State of for lotto winners. Lotto winnings from California lotteries are not taxable in California. So while winners in other states may face additional state income taxes on their winnings, California winners avoid the additional tax obligation.
By Trevor Stapleton
The midterm elections have changed the political landscape in Washington, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it is still too early to know exactly how this will affect the array of open tax issues for 2010 and 2011.
Of particular importance, Congress must decide whether to extend any of the Bush-era tax rules that will otherwise expire at the end of 2010. Without Congressional action, individuals will face higher tax rates on their income, including capital gains. Consequently, it may be beneficial to conclude any sales in 2010 to benefit from the lower capital gains rates.
Also, unless Congress changes the rules, the estate tax will return next year with an exemption level of only one million dollars and a 55% top estate tax rate. As such, estates that were under the estate tax exemption level of $3.5 million over the last several years may now be taxable, and estate tax planning steps may therefore be advisable.
In short, year-end planning—which always involves some educated guesswork—is a bigger challenge this year than in past years.
If you have questions about year end tax planning, contact us as soon as possible so that if action is advisable, there will be time to complete the steps before 2011.