After Saturday night’s drawing came and went without a winner, the Powerball jackpot has ballooned to a staggering $1.04 billion (yes, billion with a b.) The next drawing is Monday, Oct. 3 and according to the Multi-State Lottery Association, it’s the fourth largest jackpot in Powerball history.
The last Powerball winning ticket was sold in California on July 19. Since then, there have been 32 consecutive drawings without a Powerball lottery winner.
While the odds of becoming a Powerball winner are slim (1 in 292.2 million to be exact), it’s hard to resist daydreaming about what you’d do with all that money. But how much of the lottery prize would you take home after taxes? We’ll break it down – and suggest five ways to safely invest your windfall.
How are lottery winnings taxed?
No matter how lucky you are, Uncle Sam will still come knocking. The IRS taxes lottery prizes differently depending on how the winner chooses to get paid. You have two choices: lump sum payout or annual payments spread over 30 years. In truth, most lottery winners opt for the cash lump sum upfront, even though it ultimately means fewer dollars in their pocket.
What do federal taxes look like on a lump sum payment? The federal tax rate on any prize over $5,000 is 24%, which gets immediately deducted from your winnings. And for a large prize like the Powerball, that lump sum will also catapult you into the highest income tax bracket, so you’ll pay the top federal tax rate of 37% the following year.
The annuity option gives you the whole $1.04 billion pot over a longer time span, but you’ll still see that 24% taken off the top of every payment. And for gigantic lottery prizes like the Powerball, you’ll also be in the highest federal income bracket come tax time and have to pay any federal taxes you owe beyond that withholding.
There’s also the state tax bill
Just when you thought your windfall was safe, here come state taxes. How much you’ll pay in state income taxes depends on where you live. New Yorkers pay the highest state tax rate at 13%, but the applicable state tax rate across the country varies from 2.9% to 8.82%.
Of course if your luck holds, you might find yourself in one of the following states that doesn’t charge state tax on income:
- Alaska
- Florida
- New Hampshire
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
- Washington
What would you pocket after paying Powerball taxes?
Counting your chickens before they hatch might be bad luck, but let’s say you win that billion-dollar jackpot. If you choose the lump sum payout, you’ll be paid $478.2 million up front.
However, because your winnings are also subject to a 24% tax withholding, that cash value means you’ll only walk away with $363.4 million to put in the bank. Depending on your filing status the following year, that sum is also subject to a tax rate as high as 37%, which means that money dwindles down significantly before you even file your state tax return.
If you’re willing to wait for three decades, the annual payments start at nearly $16 million the first year and increase by 5% every year, topping $64 million by year 30. That’s before federal taxes.
If you want to run the numbers and see the fine print, you can use the Powerball Taxes Calculator to learn more.
Source: Yahoo Finance
