Lottery and Boxing Match Payouts and Taxes

This month I thought I might delve into the world of large payouts for scenarios like large lottery winnings and boxing match payouts. The fact that millions of dollars are paid out periodically to the chosen few who actually win a lottery (my philosophy has always been, you can’t lose if you don’t play) and those who garner large payouts for a feature boxing match such as the Mayweather/McGregor fight tomorrow night.

The amount of lottery prize money or payouts to these athletes is amazing to us commoners. While the mere dollar figure of the prize or payout catches everyone’s attention, the tax consequences of this income to these individuals is also just as mind-blowing and absurd. Obviously, when someone is taking in millions in winnings or payouts, they will obviously be in the highest marginal ordinary income tax rate bracket for that year. Currently (until Congress and the President can make any changes to the tax code), the highest marginal federal tax rate is 39.6% and the highest state tax rate can be as much as 13.3% in some states (CA).

For the lottery winner, assuming he or she takes the lump sum distribution option, the actual payout will be much less than the stated winning amount. For the most recent Power Ball winner in Massachusetts, her stated grand prize winnings are $758.7 million. However, she will “only” receive $480.5 million because she chose the lump sum option rather than receiving the full funds over 30 years. From that $480.5 million, she will then have federal and likely state withholding taken out before she receives what remains. The minimum federal withholding requirement will be 25% of that amount up front with the remaining balance (difference between 39.6% and 25%) being due when she files her 2017 income tax return early next year. In summary, she will be pay total federal tax of roughly $190 million and Massachusetts tax of roughly $25 million leaving her with roughly a “paltry” $265 million to do with what she wishes. If she is wise (which most lottery winners have not been), she will invest the bulk of those funds for the benefit of herself, her family and whoever else she desires to assist. The sad history of lottery winners is that they tend to blow their newfound wealth and end up back where they began.

The final numbers are not yet in for the big fight this weekend, but Floyd Mayweather is expected to receive roughly $300 million and Conor McGregor is expected to receive roughly $100 million. The same tax scenarios as described above for lottery winnings would apply to these fighters. The rumor is that Mayweather already owes the IRS a large sum in delinquent taxes and hopes to pay off that debt from the proceeds of this fight. His problem is that the earnings from this fight will create a large sum of additional tax debt on top of what he already owes. Such is the life of a star – all we can do is feel sorry for them, right? I don’t think so.

If you have any tax or accounting questions, please contact us at 480-558-0700. The business extended filing deadline is fast approaching on September 15th and the personal deadline is not long after that on October 16th. If you are an existing client who has not yet provided us your information, please do so this week in order to give us time to complete your returns before the deadlines.

We will also begin our yearend tax planning appointments shortly after the October 16th deadline.

Mark J Weech, CPA