The Billion Dollar Powerball Aftermath!

So just like millions of other people, I bought a Powerball ticket last week (well, maybe more than just one). Yes, I know, the odds of hitting the jackpot were 1 in 292 million. But I played anyway.

And guess what????

I didn’t win (feign shock). Oh well.

A picture that shows how to read a losing Powerball ticket

But I am ready, with my new ‘lucky’ set of numbers, for the next ‘billion’ dollar Powerball (whenever that is).

And now that the Powerball frenzy has quieted down I got to thinking about the amount of money that flowed into state coffers during this recent ‘billion’ dollar Powerball season and how this branch of the lottery tree came into being.

The history of the Powerball can be traced back to the Multi-State Lottery Association (now the MUSL) which was formed in 1987. When the MUSL began, only DC, IA, KS, OR, RI, WV participated. On April 22, 1992 the first Powerball drawing was held. Since then, states have gradually signed on. Today, Powerball is currently offered in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. You can see if your state participates here.

Why have so many states signed on? The same reason Americans snatch up lottery tickets to begin with: money.

You already know that federal (and state, where applicable) income taxes are payable by the winner, whether winnings are taken in a lump sum or as an annuity. But what about those states that sell tickets and don’t produce a winning ticket? They’re still winners. While about 50% of ticket sales are paid out in the form of prizes, net profits (after expenses) are retained by the individual lotteries and used to fund projects approved by the respective legislature.

Twenty-seven states spend some of those profits on education, including New Jersey. As a state, New Jersey depends heavily on lottery dollars (as well as other gambling revenue). The New Jersey lottery is the fourth largest revenue producer for the state. In the last fiscal year, the lottery grossed over $2.9 billion in sales and sent nearly a third of that, $965 million, to the state’s coffers to help fund education.

Lottery proceeds in New York also support schools: the New York Lottery’s sole mission is to earn money for education. Last fiscal year, the Lottery contributed $3.11 billion, or about 14% of total state education funding, to local school districts. The New York Lottery touts itself as “North America’s largest and most profitable Lottery” earning over $54.7 billion since it began.

California lottery dollars are used to supplement funding to public education; since the 2000-2001 fiscal year, the Golden State has sent more than $1 billion a year to public education. Ditto for Georgia which uses proceeds to fund specific education programs including tuition grants, scholarships or loans at eligible Georgia colleges, universities, or technical colleges and pre-kindergarten programs. In 2015, the state used more than $980 million in lottery proceeds to fund education.

Oklahoma also directs lottery winnings to education. By law, 45% of lottery funds are used to support elementary and secondary education from compensation for public school teachers to technology upgrades for school systems. A whopping 39.5% of lottery funds are used to further higher education institutions via tuition grants, loans and scholarships for Oklahoma residents, endowed chairs for professors and renovations and expansions projects. The remaining money is used to boost technology centers and fund the Teacher’s Retirement System Dedicated Revenue Revolving Fund and the School Consolidation and Assistance Fund.

Arizona splits lottery revenues among four causes: the lion’s share goes to education with the remainder directed to health and human services, economic & business development and the environment. Nebraska also splits its lottery revenues – with a twist. In addition to funding educational and environmental causes, Nebraska sends 10% of its lottery revenue to the state fair (just over 1% goes to the Compulsive Gamblers Assistance Fund).

Colorado almost exclusively directs lottery winnings to the environment. In 1994, Colorado voters decided to fund projects from lottery winnings as follows: 50% to the Great Outdoors Colorado (GOCO) Trust Fund, 40% to the Conservation Trust Fund, and 10% to Colorado Parks and Wildlife. If GOCO funds exceed $60.3 million, the overage is redirected to the Colorado Department of Education, Public School Capital Construction Assistance Fund.

In Pennsylvania, lottery dollars benefit senior citizen programs; it’s the only state in the country that earmarks all lottery dollars specifically for this purpose. Last year, the Pennsylvania Lottery generated more than $1 billion in PA Lottery benefits to provide low-cost prescription drugs, free and reduced-fare transit, property tax/rent rebates, long-term living services and senior centers for older Pennsylvanians.

Wisconsin bucks the trend of using funds to fill in budget gaps: the money raised by the lottery is returned to taxpayers. Since 1988, the Wisconsin Lottery has generated more than $3 billion for property tax relief. Including winners, retailer rewards, staff and property tax relief, the Wisconsin Lottery estimates that it returns at least 95% of revenue to Wisconsin taxpayers.

But of course, as priorities change, so does funding. Prior to 1997, proceeds from the sales of lottery tickets in Texas were deposited in the general revenue fund. Since 1997, funds have been used largely to support public education. Vermont had a similar transition: for a period of 20 years, lottery profits were directed to the General Fund but in 1998, the Vermont Legislature mandated that all lottery profits instead be deposited in the state’s Education Fund.

States also benefit from sales tax boosts. While sales taxes are not imposed on the sales of lottery tickets, they are generally imposed on all of the extras you buy in addition to tickets. That might include the cup of coffee and a donut you buy while waiting in those long Powerball ticket lines. It might also include gasoline at the convenience store or a pack of cigarettes at the counter while you’re checking out – in those cases, the feds win, too, through the imposition of excise taxes on items like gas and tobacco. Convenience stores and other retailers report considerably more business when taxpayers are in a frenzy over a potentially huge jackpot. That translates into more sales of goods – and therefore more revenue for taxing authorities.

And what if the winning ticket isn’t claimed? It happens more than you think – especially when there are big jackpots. That’s because folks who buy tickets tend to check to see if they won the big prize and may forget to check to see whether they might have won a smaller prize. Those dollars add up. If unclaimed prizes aren’t collected within the allotted time frame, they’re kept by the state (or territory). About half of the lotteries are required by state law to put the money back into another game: the other half is required by law to turn the money over to the state’s general fund.

Whether relying on dollars brought in from what many consider to be legalized gambling is good policy for states might be a moral question. In terms of finances, however, there’s no question: while it’s fun to fantasize about winning Powerball, when it comes to filling those state coffers, everybody wins.

What do you think? Are the monies going to the right places?


Bruce – Your Host at The Tax Nook

Our Firm’s Website: (or just click on the icon on right sidebar of this page).

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Categories: Income Tax, Lottery


Sooooooooo were you a bit disappointed when you woke up this morning and found out that you will have to put that purchase of your private island on hold for just a little bit longer?

Well by now I’m sure that you know, that no one won the Powerball jackpot on Saturday night. The Powerball lottery is now up to,
$1.3 Billion (as of this writing), the largest jackpot in U.S. history.

The winner of the jackpot can choose to take the mega-millions over a lifetime or opt to take a lump sum (cash value) payment. The lump sum is currently valued at $806 million.

But (Spoiler Alert) if you hold the winning ticket and choose the lump sum, do not plan on spending all $806 million just yet. By law, lottery officials are required to withhold federal taxes from lottery winnings, whether you win a few hundred thousand, a few hundred million, or even over a billion dollars. The rule is this: you may be subject to withholding of 25% of your winnings for federal income tax purposes if the winnings minus the wager are more than $5,000 and are from a lottery. Different withholding rules apply to certain other kinds of gambling like bingo, keno, or slot machines and non-cash winnings – or if you’re subject to backup withholding (most taxpayers are not). Since, however, the Powerball will pay out in cash, you should expect to pay out
$201.5 million in withholding alone, leaving you with a check worth about $604.5 million.

Withholding is the amount that the federal government insists the lottery
authorities hold onto, not your actual tax liability. It’s the same principal as
what happens with your paycheck: a certain amount is withheld and remitted to
the U.S. Treasury on your behalf. When you file your income tax return and settle your tax bill the following year, you figure your tax, get credit for what was withheld  (plus any additional estimated payments you made along the way) and pay the difference (or you get a refund if you paid more than you owed).

So how much tax would you pay on $806 million? Somewhere in the neighborhood of $319 million. But OK, you want exact numbers. So it works out to $319,129,675 (using 2016 rates).

Lucky for you, the feds already have your $201.5 million, so, at tax time,
you’ll just have to write a check for $117,629,675 – plus potential underpayment
penalties if you didn’t pay any estimated payments, depending on your circumstances.

And no, for those of you who are wondering, the Net Investment Income Tax (NIIT), that extra 3.8% levy on certain investment income, doesn’t apply to lottery winnings.

But for full disclosure, I figured that amount for a single taxpayer, assuming no other income or deductions. You’ll have some of those – except forget about saving those medical receipts to use for deductions: you probably won’t even come close to the threshold of 10% of your Adjusted Gross Income (AGI).

And, I haven’t even mentioned legal and investment fees. You’ll pay those,
too. Fortunately, they’re also deductible.

There’s one more big deduction: state taxes. Like legal and investment fees,
state taxes are deductible on your Schedule A (i.e., the form used to itemize
your deductions). How much you’ll pay, however, depends on where you live.

There are 9 states, plus Puerto Rico, that will give you a pass on your lottery
winnings: California, Florida, New Hampshire, Pennsylvania, South Dakota,
Tennessee, Texas, Washington and Wyoming. That’s because those states either
don’t have a state income tax or they don’t impose a state tax on lottery
winnings. If you live outside of these states, be prepared to give up a chunk of
your winnings (Delaware used to exempt lottery winnings but no longer does).

Tax rates vary from state to state. Some states, like Utah, have a flat state
tax rate. Others, like Maryland, have a graduated tax rate, meaning that the
rate increases as income increases. And to make things even more complicated, three states have ten or more tax brackets. Most on that list? Hawaii, where you can pay anywhere from 1.4% to 11% – there are 12 brackets in all.

At the top end of the spectrum, California imposes a whopping 13.3% for high
incomes. But there’s a catch (of course there’s always a catch). California is one of those states that doesn’t impose a state tax on lottery winnings. If you take
California out of the equation, you’ll likely pay the most state taxes in Connecticut, Hawaii, Maryland, New Jersey, New York, North Dakota, Ohio, Vermont, and Wisconsin.

But don’t stop there, however. States aren’t the only ones that want a piece of
your winnings: local taxing authorities may want some, too. If you live in New
York state, you’ll pay 8.82%. But if you live in New York City, the local authorities will tack on an additional 3.876% to your state tax, bringing New York City residents to a top tax rate of 12.696%.

Be careful. Like the feds, New York State has a series of graduated brackets.
That means that you don’t pay a flat rate on your entire income but rather a
flat rate on each level of income. All single New Yorkers are subject to a state
tax of 4% on taxable income between 0 and $8,400 (2015 rate), whether you make $5,000 or $500 million and so on through the brackets. That means that the state tax payable on $806 million isn’t a flat 8.82%, or $71,089,200 but rather $71,088,503 (using 2015 rates). The New York City tax would subject you to an additional $31,240,129 (using 2015 rates) in tax on the same amount. The total tax for a New York City resident? $102,328,632.

The good thing is that you can deduct those state and local taxes on
your federal taxes, bringing your taxable income closer to $703,671,368. The
federal tax on that amount is $278,607,537. Add that to the state and local tax
for a New Yorker and after paying $89,336,989, you’ll still have just over
$438,055,474to play with. Again, that’s assuming that you’re single.

It’s worth noting that for the sake of keeping your head from exploding, I did
not reduce the deductions for the ‘Pease’ limitations, which would obviously
apply in the event that state and local taxes were due. The same goes
for the Alternative Minimum Tax (“AMT”).

That’s a lot of math. Here’s the math I’m guessing you really care about: your
chances of winning are 1 in 292.2 million.

One more thing:
 If you are the lucky winner, contact SOLID TAX SOLUTIONS.

We will help you keep more of your prize – (845) 344-1040.


Bruce – Your Host at The Tax Nook

Our Firm’s Website: (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: (or just click on the icon on right sidebar of this page).

Twitter: (BTW, We Follow-Back).


Categories: Income Tax, Lottery