The Powerball jackpot in November 2022 was the largest in the history of lottery drawings, at a staggering $1.9 billion. If nobody wins the jackpot in a given drawing, it will increase by at least $2 million. But what does that mean in terms of actual cash prizes?
After taxes in 2023, the Powerball cash option will be worth different amounts depending on the winner’s tax bracket and the state in which the winning ticket was purchased. If you hit the jackpot and decide to take your winnings in cash, the amount you get will be less federal and state taxes. Lottery wins are subject to federal taxes of up to 37%, and perhaps additional state taxes. The tax rates of the many states vary widely, from 0% to well over 8%. Winners should visit a tax expert to find out how much they will actually get after taxes. The winner must carefully plan for their tax responsibilities, as these will have a major influence on the final cash option they get.
How Much of a Powerball Jackpot Would You Keep After Taxes If You Took the Lump Sum?
It would be fantastic to win the lottery and take home a windfall, but depending on your tax bracket, you may only take home $8 million of a $20 million prize.
Duties to the Federal Government
The federal government will automatically take 24 percent of your profits if you win the minimum $20 million jackpot and choose the lump sum payout. If you win $20 million and use the lump sum option, you’ll pay $2,880,000 in taxes on your $12 million reward. Your bank balance has dropped to $9,120,000.
You shouldn’t spend it all though, as you’ll need some of it to pay federal and state taxes the next year. The difference between the 37% top marginal tax rate and the 24% that was withheld from your earnings would be your responsibility to pay.
It is difficult to estimate one’s true tax due without the help of a professional, and lottery winners will likely be eligible for various tax deductions and credits. A conservative estimate would put your federal tax liability at around $1 million, or 10% of your income.
This is only a rough calculation, but it seems like you’re down to about $8 million of your original $20 million lottery prize.
Expenditures at the State Level
You may also be required to pay state income taxes on your prize money, depending on where you bought the winning ticket. The highest state tax rate is 10.9 percent, which is what you’ll pay if you buy your ticket in New York.
Players in the following states do not have to pay state tax on lottery winnings: California, Florida, New Hampshire, Puerto Rico, South Dakota, Tennessee, Texas, the U.S. Virgin Islands, Washington, and Wyoming.
How Does Powerball Work?
The Powerball is offered in 45 of the 50 states in the United States thanks to the efforts of the Multi-State Lottery Association. Even though the prize and payment are identical across states, you may only cash in your ticket at retailers inside the state where you bought it.
Matching the numbers on the five white balls and the red Powerball is required to win the Powerball jackpot. The reward money is divided among the participants who correctly predicted the winning numbers. Only one person, Edwin Castro, was lucky enough to win the $1.9 billion Powerball prize that was sold at Joe’s Service Center in Altadena, California.
Payout Options for the Powerball Lottery
Powerball winners can pick from two different cashout options:
Payment in a lump sum of cash, less any taxes withheld
Payments from an annuity each year, net of taxes
How Much Does Winning Powerball Give You in One Check?
Powerball’s cash option normally pays out at a rate of 60% of the jackpot. The minimum jackpot announced is $20 million, so a winner would take home around $12 million after taxes.
Even though it’s a far cry from the $20 million prize, I’m sure you can come up with plenty of ways to spend $12 million. Make sure you factor in taxes, though.
How Much Would a Powerball Annuity Be Worth?
One payment will be made when you claim the prize, and 29 further payments will be made annually over the next 29 years if you choose the annuity payout.
The lottery organization will invest the money and give you an annuity from the earnings, so the total amount you receive is more than if you took the lump sum. The lottery prize is reflected in the stated amount due to investment returns.
Taxes on Annuity Payments
Taxes must be paid on your annuity income as well. If you win the minimum jackpot of $20 million, you’ll earn $666,666.66 every year after taxes (after dividing by 30). That’s a decent yearly wage even in the most expensive U.S. metropolises.
The annuity payments you receive from winning the Powerball with $20 million will place you in the 37% tax bracket, or very near to it if you are married and filing jointly. Earning more than $578,125 as an individual taxpayer or $693,750 as a married couple filing jointly in 2023 will result in a marginal tax rate of 37%.
Keep in mind that your annuity income will likely be taxed at the maximum rate because most Powerball payouts are substantially larger than the minimum beginning prize.
If you win the Powerball, should you choose a lump sum or an annuity?
Most individuals opt for the lump sum reward even though it results in a lesser cash payout and a much larger tax bill for the winning Powerball ticket. Since 2014, not a single winner has opted for the annuity payout. The vast majority of recipients of such a windfall consult with a financial planner on how best to maximize their return on investment.
If you aren’t sure you can keep from spending all of a lump sum payout due to rising interest rates, an annuity may be your best bet. The lump sum cash value payment is still the best option if you don’t think you need the money right away or can invest it in a way that would provide a greater return than government bonds, where lottery winnings are often kept.
FAQs
Q1. How much federal tax is deducted from Powerball winnings?
Powerball winners face a maximum 37% federal tax withholding rate. Before the winner receives their award, federal income taxes will be deducted.
Q2. Do all states tax Powerball winnings?
Powerball wins are taxed federally, but not all states do. Powerball winners in several jurisdictions may not pay state income taxes on their winnings. Most states tax lottery winnings, but rates vary.
Q3. Can I lower Powerball taxes?
Powerball wins are taxable, but there may be ways to decrease the tax burden. The gains might be offset by charitable gifts in the same tax year. Tax professionals can help you find deductions and credits.
Q4. Should I report Powerball winnings to the IRS?
The IRS must record all Powerball prizes, regardless of the amount. The lottery corporation will send Form W-2G, which lists wins and taxes withheld. For tax compliance, submit any lottery wins.
