The Powerball jackpot has reached approximately $725 million, making it the seventh-largest prize in the game’s history, according to the lottery. However, the actual amount of the winnings decreases significantly after taxes. If you win the lottery, you can choose between receiving a lump sum of around $366.2 million or an annuitized prize of $725 million paid out annually.
According to certified financial planner John Chichester Jr., founder and CEO of Chichester Financial Group in Phoenix, one unique aspect of the lottery is the option to receive the winnings over a 30-year period through annuity payments. This allows for more flexibility in managing the tax payments. Instead of facing a large upfront tax bill, individuals can choose to receive annuity payments and invest the money in a tax-efficient way. Chichester, who is also a certified public accountant, explains that the odds of winning the Powerball jackpot are approximately 1 in 292 million.
Almost $88 million goes to the IRS
Before winners receive any of the multimillion-dollar jackpot, the IRS requires a mandatory 24% federal withholding. This withholding is applicable to winnings exceeding $5,000. Opting for the cash option of $366.2 million would automatically reduce the winner’s share by approximately $88 million due to the 24% withholding. However, it is a common misconception that this 24% covers all tax obligations. According to Chichester, winners are still responsible for an additional 13% at a later point.
Millions of dollars won in the lottery will place individuals in the highest federal income tax bracket. In 2023, the 37% tax rate is applicable to taxable income exceeding $578,126 for single filers and $693,751 for married couples filing jointly. To determine taxable income, one should subtract the larger value between standard or itemized deductions from their adjusted gross income.
The 37% mentioned above does not apply to the entirety of your taxable income. In 2023, if you are filing as a single filer, you will have to pay $174,238.25, plus 37% of any amount over $578,125. If you are a married couple filing jointly, the total amount owed will be $186,601.50, plus 37% of any amount above $693,750. The final tax bill will vary based on various factors but could potentially be significantly higher, possibly amounting to millions more.
Depending on your location and where you purchased the ticket, you might be required to pay state taxes. Certain states do not have income tax or impose taxes on lottery winnings, while others have high-income tax brackets that exceed 10%. The Mega Millions drawing on Tuesday night offers another opportunity to win a substantial amount. The current estimated jackpot is $500 million, with odds of winning the jackpot at approximately 1 in 302 million.