Financial Focus: Powerball Jackpot Mania! A quick lesson on Taxes, Annuities & Gambling

Anthony RivieccioThe Powerball Jackpot: Lessons Learned

by Anthony Rivieccio, MBA

 

A Quick Lesson on Taxes, Annuities & Gambling

Powerball is over! Thank god! Didn’t win, huh? Did you learn any personal finance lessons from this? After all, you did lose money, right?

Recently, the New York Daily News ran an article about winning the Powerball jackpot in New York City and what the tax bite would be. While they covered the “tax bite” fairly well, they could have discussed “annuities” and “gambling losses” a lot more.

Let’s examine Powerball through the lens of personal finance.

Taxes on income:

The Daily News says, “Between the federal and state taxes, you lose more than 50 cents on the dollar. And then there are city taxes, too.”

  • All lottery winnings are subject to a 25% federal tax withholding. Winners will then have to pay the state tax of 8.8% and the city tax of 3.9%.

The News notes that after the triple whammy tax hit: “You shouldn’t spend it all at once because there are still more taxes to pay at the end of the year.”

  • That’s because the actual federal tax rate on the winnings will be 39.6% — so winners are left to pay the difference from the 25% withholding.So, in simple terms:
    Federal:                                    25.00%
    New York State:                        8.80%
    New York City:                           3.90%
    April 15 Federal Taxes:           14.60%
                                                                          
    Total Tax Burden:                    52.30%

Annuities:

The News suggests that rather than taking the lump sum payout, the jackpot winner can reduce the tax bill by choosing to receive annual payments for the next 30 years. That’s guaranteed monthly tax deferred income! That’s like getting a retirement check every month from your pension or company 401k or bank IRA. This is what an annuity is, normally originated through life insurance companies and distributed through life insurance or banking institutions.

Gambling:

The News forgot to mention that you can deduct your gambling winnings. The finality comes when the new illustrious winner receives what is called a W-2G.

  • Under IRS Publication 17: Chapter 12 Gambling, your gambling winnings are considered income, therefore you are allowed to deduct, up to the amount of winnings. You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. You can claim your gambling losses on Form 1040, Schedule A as an “Other Miscellaneous Deduction.”

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses

  • Examples of gambling losses include: playing games of chance at casinos, placing wagers on horse and dog races, and buying lottery and raffle tickets.
  • Losses as the result of gambling or wagering are generally deductible because gambling is an activity to produce income. The legality or illegality of the gambling doesn’t impact the deductibility of your wagering losses.
  • The taxes rules are similar even if you’re a professional gambler. You can only take a deduction for your losses up to the amount of your gains. You can claim your losses as business expenses and winnings as business income on Schedule C.

Keep a diary or log book that tracks gambling losses include:

  • Date and type of gambling activity or wager you placed
  • Name and address of the place you gambled
  • Names of other people with you while you gambled
  • Amount you won or lost

In addition, you should keep other documentation that shows your winnings and losses, wagering tickets or slips, checks and bank statements
Statements showing your winnings or receipts showing payments that are issued by the gambling establishment.

A crazy way to look at it is, if you won $1.5 billion, you have, up to that amount for the rest of the year to spend, gamble and deduct.

So, forget Powerball! Go back to work. But remember the tax, annuity and gambling winnings/losses lesson learned.

Anthony Rivieccio is the founder & the CEO of The Financial Advisors Group, celebrating their 20th year as a fee only financial planning firm specializing in solving one’s financial problems. Anthony, a recognized financial expert since 1986, has been featured by many national and local media including: Klipingers Personal Finance, The New York Post, News12 The Bronx, Bloomberg News Radio, Bronxnet Channel 67 TV, The Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Bronx News and The Bronx Chronicle.

For financial inquiries, assistance or a FREE COPY of a 2015 Income Tax Guide, Anthony can be reached at (347) 575-5045 or advisorsgroup@ymail.com.

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