Last Updated on October 21, 2023 by SPN Editor
After Wednesday’s drawing concluded without a Powerball jackpot winner, the Powerball prize has grown to an astounding $1.73 billion, making it the second-largest jackpot in Powerball history according to the Multi-State Lottery Association. The last winning Powerball ticket was sold in California on July 19, and since then, there have been 35 consecutive drawings without a jackpot winner.
Despite the slim odds of winning the Powerball (1 in 292.2 million), many can’t help but imagine how they’d handle such a substantial sum. However, it’s essential to consider how much of the prize you’d actually receive after taxes.
How Are Lottery Winnings Taxed? Regardless of your good fortune, the IRS will claim its share. The IRS taxes lottery prizes differently based on the winner’s choice of payment. Winners can choose between a lump sum payout or annual payments spanning 30 years. Most lottery winners opt for the immediate lump sum, despite its lower overall payout.
For a lump sum payment, federal taxes are levied at a rate of 24% on any prize exceeding $5,000, deducted upfront from your winnings. Furthermore, substantial prizes like the Powerball thrust you into the highest income tax bracket, leading to a 37% federal tax rate in the following year.
The annuity option, providing the $1.73 billion jackpot over an extended period, incurs a 24% withholding on each payment. For large lottery winnings like the Powerball, you’ll also fall into the highest federal income tax bracket and need to pay federal taxes beyond the initial withholding.
State Taxes Also Apply Don’t forget about state taxes; the amount you’ll pay varies based on your place of residence. New York imposes the highest state tax rate at 13%, while rates across the country range from 2.9% to 8.82%. Fortunately, some states, such as Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Wyoming, and Washington, do not levy state income taxes.
Your After-Tax Prize Assuming you secure the billion-dollar-plus jackpot, opting for the lump sum payment grants you an upfront sum of $756.6 million. However, a 24% tax withholding on your winnings reduces this amount to “only” $575 million, which you can deposit in your bank account.
Depending on your filing status in the subsequent year, this sum may be subject to a tax rate as high as 37%, significantly diminishing your funds before you even file your state tax return. (Nevertheless, you’ll still be a millionaire several times over.)
Powerball tickets cost $2 per entry and are available for purchase in 45 states, along with the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Over fifty percent of the revenue generated from Powerball ticket sales stays within the area where the ticket is sold.
Powerball draw events are broadcast live three times a week, specifically on Mondays, Wednesdays, and Saturdays at 10:59 p.m. EST. These live drawings take place at the Florida Lottery draw studio in Tallahassee and are additionally accessible via live streaming on Powerball.com.
For those willing to wait three decades, annual payments will commence at $26 million in the first year, increasing by 5% annually and reaching $107 million by the thirtieth year. These figures are prior to any federal tax deductions.
Q1. How are Powerball winnings taxed?
The taxation of Powerball winnings depends on whether you choose a lump sum payout or annual payments. For the lump sum option, a federal tax rate of 24% is applied, and you’ll also face the highest federal tax rate of 37% the following year, as this large sum pushes you into the top income tax bracket. For annual payments, the 24% federal tax rate is applied to each installment.
Q2. Are there state taxes on Powerball winnings?
Yes, state income taxes on Powerball winnings vary depending on your state of residence. The tax rate can range from 2.9% to 13%. Some states, however, don’t impose any state tax on income, offering a potential tax advantage for winners.
Q3. Are there any states with no state income tax on lottery winnings?
Yes, there are several states that do not tax lottery winnings, including Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Wyoming, and Washington.
Q4. How much money will I actually receive if I win a Powerball jackpot?
If you are a Powerball jackpot winner and choose the lump sum option, your payout will be reduced by the federal tax withholding rate of 24%. For example, if you win a $1.73 billion jackpot, you’ll receive approximately $756.6 million upfront after federal taxes. However, you’ll also need to account for state income taxes, which vary by state.
Q5. What if I choose the annuity option for Powerball winnings?
If you opt for the annuity option, you’ll receive the full jackpot amount over 30 years, with each payment subject to a 24% federal tax withholding. Over time, these payments will increase by 5% annually. You’ll also be responsible for any federal and state taxes on each annual installment.
Q6. How can I minimize taxes on my Powerball winnings?
While you can’t eliminate taxes on your Powerball winnings, you can consider strategies such as spreading out charitable donations, managing investments wisely, and consulting with financial professionals to minimize your tax liability.