If there is a winner of the upcoming Power Ball Lottery, they could end up winning over $1.4 billion. And accompanying this once-in-a-lifetime bonanza will be a tax bite that could run as high as $400 million, depending on how the payout is taken, as well as other considerations, such as the winner’s home state of residence and whether they use any creative tax-sheltering vehicles.
But whatever the payout, it is clear that the winner will be paying more in taxes than some of the nation’s largest corporations.
What is wrong with this picture?
According to MSN.com, based on a Power Ball jackpot of $1.4 billion, if the winner takes a lump-sum distribution (as opposed to the alternative: a 29-year annuity), the winner will be paid $868 million. Now, depending on how the winner chooses to take their money, they can choose the annuity option, but if they die before collecting the full amount, the present value of the remaining payments becomes part of their taxable estate for federal estate tax purposes. “The first $5.45 million (indexed for inflation in future years) will be sheltered by your federal estate tax exemption, but anything in excess of that amount will be taxed at a 40% rate,” MSN said.
Since all lottery jackpots are fully taxable and jumbo jackpots are taxed at the maximum federal rate of 39.6%, the federal income tax hit would approach $344 million, (assuming an $868 million win.) Federal income tax is automatically withheld from any lottery prize, but only at a 25% rate. So on an $868 million payout, you would still owe the federal government almost $127 million, according to Marketwatch.
While this amount can be reduced if the winner lives in a state with a low tax rate (Nevada, Texas or Florida), but it’s safe to assume this will approximate the winner’s tax bite.
Corporations That Do Not Pay Taxes
While that certainly is a lot of money, it is more than what 20 of America’s top corporations paid in federal taxes in the second quarter of 2014, according to CBS Marketwatch.
This number is comprised of “20 companies in the Standard & Poor’s 500, including drug maker Merck (MRK), computer storage company Seagate (STX) and automaker General Motors (GM), which reported effective tax rates of 0% or lower in the second calendar quarter despite reporting a profit during the period, according to a USA TODAY analysis of data from S&P Capital IQ,” according to the site.
Here is a list of the companies that paid no taxes in 2Q 2014:
So what’s the moral of this story?
While the media is rightfully agog over the huge amount of money to be won at random, it has failed to note that the tax structure of this country is slanted against average Americans. This is a gross oversight at any time, but is especially worse during an election year when such injustices can be corrected.
The reality is that the average American (the one who randomly won the Power Ball) assumes too much of the tax burden than the nation’s largest corporations that regularly make the tax rules.
But we can be sure that if an American corporation won the big lotto prize (after all, corporations are people, too) they would not pay anywhere near the amount the average citizen is paying. After all, those are the corporate rules made by the corporations.
