Since no one clinched the Powerball jackpot, it’s now soared to a staggering estimated $650 million for the next draw on Monday. Yet remember, the IRS will take a chunk out of those winnings. From $615 million, the prize money has bumped up to $650 million since no winning ticket was found on Saturday. If luck is on your side, you now have the option to choose between an estimated lump sum of $328.3 million or an annuitized prize of $650 million paid out annually.
However, keep in mind that your odds of winning the top prize are about 1 in 292 million. You might consider accepting the annuity payment and investing it tax-efficiently rather than facing a hefty, upfront tax bill, suggests Chichester, a certified public accountant. The IRS automatically withholds 24% – which is about $78.8 million – from winnings exceeding $5,000, even before winners can get their hands on the jackpot. This means, if you opt for the $328.3 million cash option, the 24% withholding will immediately reduce your share.
Understanding the Tax Implications of a Lottery Win
Contrary to what many taxpayers assume, this 24% doesn’t settle your tax obligations. Chichester notes, “After the initial 24% deduction, you’re still liable for the remaining 13%.”Here’s why: Winning a lottery of such magnitude will catapult you into the highest federal income tax bracket. For 2023, a 37% rate applies to a taxable income of $578,126 or more for single filers and $693,751 or more for married couples filing jointly. Your taxable income is calculated by subtracting the higher of the standard or itemized deductions from your adjusted gross income.
Do note, the 37% tax rate doesn’t apply to your entire taxable income. For single filers in 2023, they will owe $174,238.25 plus 37% of the amount over $578,125. For married couples filing jointly, they will owe $186,601.50 plus 37% of the amount over $693,750.
The final tax bill will depend on a range of factors but could amount to millions more. Moreover, you might also be liable for state taxes, depending on where you live and where you bought the ticket. While some states don’t tax income or lottery winnings, others have top-income state tax brackets that exceed 10%.