With no one hitting all winning numbers in Saturday night’s Powerball drawing, the top prize has jumped above the half-billion-dollar mark.
Now at a whopping $550 million for Wednesday night’s drawing, the jackpot has been growing for more than two months of twice-weekly drawings. And while the odds are stacked against players winning it — your chance is about 1 in 292 million — the IRS is always a guaranteed eventual winner.
“The big impact on winnings is taxes,” said certified financial planner Dan Routh, a wealth advisor at Exencial Wealth Advisors in Oklahoma City. “If you win, just realize how big the tax bill can be and make sure you’re ready to handle it.”
Whether the winner takes their prize as an annuity spread out over three decades or as an immediate reduced lump sum, lottery officials are required to withhold 24 percent for federal taxes.
However, the top federal tax rate of 37 percent means the winner would owe a lot more at tax time.
For Wednesday night’s drawing, the cash option — which most winners go with — is $335 million. The 24 percent withholding would reduce that by $80.4 million.
Assuming the winner had no reduction to their taxable income, another 13 percent, or $43.6 million, would be due to the IRS ($124 million in all).
That would leave the winner with $211 million before state taxes. That levy ranges from zero to more than 8 percent, depending on where the ticket was purchased and where the winner lives.
In other words, federal and state taxes combined could eat up more than 45 percent of winnings.
However, there are strategies you can employ that reduce your taxable income, and therefore the amount you pay in taxes.
For example, you could make a cash donation of up to 60 percent of your adjusted gross income and carry forward, up to five years, any excess amount. Some lottery winners set up their own charitable foundation and donate a portion of their windfall to it.