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Lottery luck, Social Security and taxes

By Kay Bell · Bankrate.com
Thursday, June 6, 2013
Posted: 6 pm ET

I admit it. I was a little miffed that an 84-year-old won the recent $591 million Powerball jackpot. Not to be ageist, but really, couldn't someone a little younger -- and by a little younger, I mean me! -- get a little lucky?

The winner, Zephyrhills, Fla., resident Gloria C. Mackenzie, had a lot of things go her way in connection with the winning ticket.

Another customer at the grocery store where Mackenzie bought her ticket let her go ahead in the lottery line. Since Mackenzie's winning numbers were from a randomly generated ticket, getting that particular configuration was literally the luck of the draw at that time.

Then there's Mackenzie's tax luck.

Sure, in taking her winnings as a lump-sum payment of almost $371 million, the Florida grandmother had to immediately hand the Internal Revenue Service 25 percent of the money. That gives her "just" $278 million or so to bank.

But since she lives in Florida, she doesn't have to worry about state income taxes.

Prepare to win, pay taxes

Mackenzie also is smart. She showed up at the Florida lottery headquarters with two attorneys and a financial adviser in tow.

Lottery spokesman David Bishop said the group was "very prepared" and spent about two hours going through the necessary paperwork. "They had clearly been preparing for this. They took all this time to get everything in order," Bishop said.

Mackenzie also will need those advisers for additional tax guidance in the coming months.

She'll be getting a W-2G form with specifics on her winning amount and the taxes she paid upon receipt. Since she's now in the top 39.6 percent tax rate income bracket, she'll have to pay the remainder of her taxes due on the lottery money with her 2013 Form 1040.

If she invests some of her winnings, a safe bet since she has a financial adviser, depending on how well those investments do she'll have to continue to file tax returns to report those taxable earnings.

Possible Social Security taxes, too

And although Mackenzie is guarding her privacy -- she didn't speak to the media gathered to watch her claim her jackpot -- it's also probably safe to assume that at age 84 she is collecting Social Security.

Her future lottery-based investment income could mean she'll face taxes on a part of those government retirement checks.

Generally, Social Security benefits aren't taxable if they are a senior citizen's only income. But if a person collects other income in addition to Social Security, he or she could owe taxes on at least a portion of their federal retirement benefits.

How much of  Social Security might Uncle Sam tax? As much as 85 percent of your benefits could be taxed if your supplemental retirement income is significant.

Of course, I'm sure that a little thing like taxes isn't going to tarnish the glow of being the winner of the largest jackpot ever won by a single lottery ticket holder.

And although I'm still ticked that I didn't match a single number in that big lottery draw, Mackenzie's luck has provided me with a new lottery playing strategy. From now on, I'm giving my 78-year-old mother my $5 and having her buy my Powerball and Mega Millions tickets!

***

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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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11 Comments
Dennis
March 19, 2014 at 10:07 am

Social Security should not even enter into this case, as Social Security is a repayment of earnings put into the Social Security account by the recipient and their employers and is in no way a government "BENEFIT". Also anyone who is over the age of 80 years, should have to pay taxes on any earnings. As for Social Security, there would be plenty in the account if LBJ had not signed a bill to put it into the General Fund, instead of leaving it off limits to the Senators, Representatives and others who have access to the General Fund. Just Consider the interest, the number of persons whom have paid into SS for years only to die from some reason, never drawing anything, other than the $250.00 paid out to the families, and those who pay into it all their lives, retire, and expire after only drawing from one to five years.

Dosi
March 19, 2014 at 4:17 am

I say she should take her winnings and do like all the other rich residents are doing: Follow the Trend - Find some property in a foreign country and go live their and take the remainder of her money with her. Or buy her own island and start a foundation that somehow aides the citizens within a foreign country. Maybe, Belize, Costa Rica, Nicaragua, Guam, etc. which are all so popular now with the rich. At 84, she may/may not have long to live so why not go!

Dosi
March 19, 2014 at 3:54 am

The real problem is that Social Security has to take that 85% in the first place. Individuals work, WORK, ALL THOSE YEARS TO RECEIVE THE EARNINGS THEY COMPILED. Then when they either become disabled or retire Uncle Sam says "IF YOU EARN ANY ADDITIONAL INCOME OVER YOUR MONTHLY AMOUNT THAT THEY WILL DEDUCT THAT FROM YOUR MONTHLY AMOUNT. Ludicrous, in an age when the economy is terrible, when home prices are astronomically high, when utility companies are choking customers by overcharging them or by not accurately estimating their usage rates. Yes, completely ludicrous! And I mean that! In this day and age, Seniors should be allowed to make additional income just to afford their daily expenses of living . When some retirement housing facilities are charging as much as $300,000 to get a unit Seniors need the extra income! As for the disabled, they too should be allowed to make additional income, if they are capable of doing so, and not be penalized for it. The rising costs of healthcare in an age when Doctors don't care about patients as much as they care about entering data on computers. First shows that healthcare is a kneejerk business now....not a field that cares about the patients well-being. She should be allowed to retain all the money at her age and the government should back-off.

Curt
June 16, 2013 at 10:57 am

Even following your estimates of having the final amount of 278 million after taxes-
"
If she invests some of her winnings, a safe bet since she has a financial adviser, ...... "

One word.

WHY ?

It's not like she only got 50K & needs to make that increase, it's 278 million.

Setting up a some kind of charity to create deductions is fine, but she has no reasonable reason to make a sum that large grow.