The winners of the $587 million Powerball jackpot should obviously consider themselves lucky. But they should be especially grateful that they won in 2012 and not next year, when a possible dive over the so-called fiscal cliff would certainly slash their winnings.
Two Powerball winners, one from Arizona and another from Missouri, were announced on Thursday and will split the jackpot. Assuming they take the lump sum of $384 million right now rather than the full $587 million over 29 years, each winner will receive about $125 million after state and federal taxes. Not bad.
But consider this hypothetical scenario.
Imagine it's Jan. 1, 2013, and President Barack Obama and Republican congressional leaders have failed to reach a budget deal. The breakdown has triggered the dreaded "fiscal cliff," meaning the income tax cuts set by former President George W. Bush have expired across the board and the tax burden on every income bracket has jumped.
Right about then, the Powerball winners are announced. How much more would Uncle Sam collect—assuming the jackpot is the same as it is today—from the fortunate souls who won after the country went over the cliff?
According to Tax Foundation analyst Nick Kasprak, the total tax burden on the winnings would jump by $17.7 million. Because there were two winners, that would amount to about $8.85 million more in taxes per person.
Congress and the White House are currently in last-minute negotiations to avoid some of the tax hikes set for next year. Despite the grandstanding on Capitol Hill this month, Congress should be able to reach a deal before the Jan. 1 deadline, but if it doesn't, taxpayers will be out of luck. There are some experts, like former director of the Congressional Budget Office Doug Holtz-Eakin, who say a failure to act could trigger another recession.
"I'd give us a 30 percent chance of doing something that stupid," Holtz-Eakin, now the president of the American Action Forum, said.
If you're not already thoroughly depressed, consider this: Under the doomsday scenario, once the federal government collects its share of the Powerball winnings, it will spend every penny in less than five minutes.