If you manage to score the winning ticket for the Powerball jackpot this Saturday evening, your winnings will shrink significantly after Uncle Sam takes its share.
The Powerball jackpot winner can choose between a lump sum of $310.6 million cash or yearly payments worth $615 million. These are estimates until the Multi-State Lottery Association takes bids on the purchase of investments.
“One thing that’s unique about the lottery is that you can accept it over a 30-year period with annuity payments,” said certified financial planner John Chichester Jr., founder and CEO of Chichester Financial Group in Phoenix. “That offers a lot more flexibility in how you pay the taxes.”
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Rather than a larger, upfront tax bill, you can take the annuity payment and invest the money in a tax-efficient manner, said Chichester, who is also a certified public accountant.
The odds of winning the Powerball jackpot are about 1 in 292 million.
More than $74.5 million ‘comes off the top’
Before winners see a penny of the multi-million dollar jackpot, there’s a mandatory 24% federal withholding that goes to the IRS. The withholding applies to winnings of more than $5,000.
If you choose the $310.6 million cash option, the 24% withholding automatically reduces your cut by over $74.5 million. However, many taxpayers wrongly assume they’re off the hook after that 24%, Chichester said.
“That 24% comes off the top, but you’re still responsible for the other 13% at some point,” he said.
Here’s why: Millions in lottery winnings will push you into the top federal income tax bracket. For 2023, the 37% rate applies to taxable income of $578,126 or more for single filers and $693,751 or higher for married couples filing together. (You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.)
Of course, the 37% doesn’t apply to all of your taxable income. For 2023, single filers will pay $174,238.25 plus 37% of the amount over $578,125. As for married couples filing together, the total owed is $186,601.50 plus 37% of the amount above $693,750.
The remaining tax bill depends on several factors, but could easily represent millions more.
You may also owe state taxes, depending on where you live and where you bought the ticket. While some states have no income tax or don’t tax lottery winnings, others have top income state tax brackets exceeding 10%.
Powerball isn’t the only chance to win big this weekend. The jackpot for Friday night’s Mega Millions drawing, meanwhile, now stands at $450 million. The chance of hitting the jackpot in that game is roughly 1 in 302 million.