I Won The Powerball! Now What?
Seems as though the topic of conversation amongst everyone over the past several days has been centered on the MASSIVE, and I mean MASSIVE, Powerball jackpot that is up for grabs. Even as I write this post, the projected jackpot is $1.5 billion (yes, “B” as in boy) with an estimated cash lump sum value of roughly $930 million. Who wouldn’t love to bring home that bacon? In the off chance that you pick the winning numbers, I thought I would toss out a few pointers before all of the shouting, jumping, and spending begins!
You Won The Powerball – Advice From A CPA
Step 1: Hire (or at least consult) a CPA.
Yes, I realize that this seems obvious at this point. After all, you now can refer to yourself as a multi-millionaire in casual conversation. However, in the midst of all of the celebrating, you are going to need a tax professional to aid you in navigating the numerous federal and state tax issues you’ll face in light of your new-found status in society.
Step 2: Assemble your team of legal and financial advisors.
Indifferent of how you decide to collect your winnings (see Step 3 below), you are more than likely going to be in the highest income tax bracket for the years ahead. You’ll need to ensure that you have an attorney, financial advisor, in addition to your CPA, to help you navigate the waters with all the intricacies that come along with having so much money in your life. Sure, there are ways to shelter income; however, these strategies are complex. Unless you have that team of advisors in your life that you trust, it will be difficult to put these methods into play.
It is also good to remember – for winners and non-winners alike – that there are investment related expenses that could potentially be deductible. These are miscellaneous itemized deductions, which mean they are subject to 2 percent of your adjusted gross income. If you’re the lucky winner, you shouldn’t hold your breath on being able to take these. For the rest of us, this is a quick (non-inclusive) list of investment-related deductible expenses:
• Software or online services you utilize to manage your investments
• Attorney and accounting costs necessary to produce and/or collect taxable income
• Fees for investment counsel and advice, including subscriptions to financial publications
• Transportation to your broker or investment advisor’s office
• Charges for automatic investment services and dividend reinvestment plans
• IRA or Keogh custodial fees, if paid by cash outside the account
Step 3: Make the choice on how to collect your winnings.
Obviously, you want your money…and you want it now! That may or may not be the wisest choice. You’ll have to have your financial team (see Step 2) conduct the proper analysis. You can take your winnings in lump sum format or you can collect them in a series of annual payments for years to come (which is called an annuity).
The advantage of taking a lump sum of money now is, well, you receive all of your money now. The disadvantage of taking a lump sum of money now is you must pay tax on the entire amount of money now.
You’ll want to keep in mind that currently, the highest ordinary income tax rate is 39.6 percent. On top of that, there is a 3.8 percent net investment income tax that is assessed to wealthy taxpayers (that’s now you if you won). If you think there is the chance that the rates could increase after the election of 2016, this could impact your decision.
The advantage of taking the annuity payments over a period of time is that you’re only taxed as you receive the payments. The disadvantage of the annuity is that you only get several million a year (real bummer). Another disadvantage is that you won’t have any control over how the winnings might grow until you receive them. Therefore, it actually might be better to take the money now, pay the tax now, and have your financial advisors invest the proceeds to gain a greater rate of return.
Step 4: Consider your gifting options.
Now that you are a multimillionaire, family members you have never heard of in your life will start crawling out from every nook-and-cranny to make sure that you know who they are!
Seriously, with all of that new wealth, you will more than likely want to share with your family, friends, and even charitable organizations.
If you decide that you want to give some of your money to your church as well as charitable organizations, make sure to consult with them, as well as your team, before cutting checks left and right. While those groups will be extremely grateful for your generosity, it may not be in everyone’s best interest to show up with big checks. In some situations, it may make sense to create an endowment fund that makes an annual gift to the organization.
In regards to your family and friends, make sure you take the time to know what sort of effect a large gift could mean to all parties involved. While gifts aren’t taxable to the recipient, if you give more than the annual gift exclusion amount to any one person – which is currently $14,000 – in any one year, there is going to be some paperwork that has to be completed.
Also be mindful of the fact that an extravagant gift could have additional financial obligations that the beneficiary isn’t quite prepared to meet. That new luxury automobile? Don’t forget that new luxury automobile will come with higher personal property taxes as well as higher auto insurance costs that might not be affordable. A new mansion on 30 acres of land? Don’t forget that with that new mansion comes increased property taxes as well as increased maintenance and operating costs that the new owner might have trouble maintaining on a yearly basis.
The ultimate gift: bequests to the heirs of your estate. The 2016 federal estate tax exemption amount is $5.45 million per individual. This amount is adjusted for inflation annually, so by the time this potentially becomes a consideration, hopefully more of your estate will be relieved from the 40 percent federal estate tax.
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