At one time or another, everybody has imagined what they would do if they won the lottery. Some people would pay off their debt, travel around the world, give to charity or make wise investments. Although there is no set path for lottery winners, one thing is certain: they will face a sizable tax liability.
The most recent Powerball jackpot of $448 million was split between three winning tickets, including a Minnesota resident. Taxes on lottery winnings vary by state, but the federal tax liability for lottery winners is fairly consistent. All three winners are likely to owe at least 39.6 percent of the winnings to the Internal Revenue Service.
Knowing that federal and state officials have an interest in taxing the lottery income, it will be important for the three lucky individuals to understand the full extent of their tax burden. If they accidentally fail to adhere to tax laws, then they could face heavy scrutiny.
In order to avoid the full weight of a tax bill, lottery winners might implement tax certain strategies -- such as transferring the winnings to a personal business. However, many of these moves may also have unexpected tax consequences.
As the media in Minnesota will be paying attention to the local lottery winner, IRS agents may also have their sights set. Facing a tax challenge from state or federal officials can be a confusing and scary experience -- especially for someone like a lottery winner who may not be accustomed to such a high income. Fortunately, however, an experienced tax attorney can help work through issues that arise.
Source: Forbes, "Three Powerball Winners Split $448M, IRS Wins Big Too," Robert W. Wood, Aug. 8, 2013