This story was originally written Jan. 8, 2016, when the jackpot was at $800 million.
Your dreams have come true: you’ve won the $800 million Powerball jackpot.
But do you really get all $800 million?
As we all know, only two things are certain in life: death and taxes. And those millions ain’t tax-free.
It’s not just the federal government that gets its share either. State governments may also collect tax on Lottery winnings. There may even be city taxes too.
The reason is, according to the Powerball website, winnings are considered income.
You will owe federal taxes immediately when you win, because the government requires the lottery to report all prizes over $600. The IRS will immediately withhold about 25 percent from the jackpot before the winner ever gets their lucky little hands on that cash.
And then, come next tax season, you’ll have to file your federal income tax return.. As you can imagine, with a sudden influx of hundreds of millions of dollars, your income tax rate is going to jump significantly. The top Federal Tax Rate is 39.6 percent of regular income. The Lottery will send you a W2-G form so you can figure out your actual taxes.
But it doesn’t stop there. Many states will tax lottery winnings. Now, if you’re a Florida resident, you don’t pay taxes. However, many of the 44 states that sell Powerball tickets do. Those tax percentages can vary anywhere from 3 percent in New Jersey to almost 9 percent in New York or Maryland. New York City tacks on an additional city tax on those winnings as well. The Lottery statistics site US Mega.com has all the state tax information broken down.
Now, there are two ways to get your Lottery winnings: you can take the lump sum, or you can take annual payments over 30 years.
First, you should know that if you take the lump sum, you will not get $800 million minus the 25 percent tax.
According to the Powerball website, the winner gets all of the cash that’s in the jackpot prize pool. But that amount is not the big $800 million sum. Analysts, including USA Mega.com, believe the number to be around $496 million (still not terribly shabby). The federal government takes its 25 percent, so the winner will get a lump sum of about $370,000,000, give or take a million. Then you’ll pay more taxes on those earnings in your income tax return the following year.
Now, if you decide you want the payments, here is how that works: Powerball pays out 30 payments over 29 years (with one payment immediately). According to USA Mega, that first payment is $26,666,667. The government then takes its 25 percent. The winner will get $20 million even for the first payment.
The Powerball people then take the rest of your winnings and invest it to fund the future payments.
If you take the cash amount, when you file your income tax, you will count that Powerball payout once. You don't file that money in subsequent years as a major source of income.
If you take the payments, you will have to pay taxes every year you get a payment because every year that payment counts as income. And as we all know, taxes can go up, and taxes can go up. So what you pay on that payout next year may be different than what you pay in taxes 10 years from now.
It gets even trickier. Remember how the Powerball website said it invests the rest of the jackpots to fund the future payments? This is what the website says:
"When you see an estimated jackpot annuity prize, we are estimating both sales and what the market's prices on certain securities will be. The annuity jackpot amount and the cash jackpot amount that we announce are always estimates until sales are final and, for the annuity jackpot, until we take bids on the purchase of securities."
So at the end of it all will you get $800 million before taxes? Maybe, maybe not.
The Powerball website goes on to remind players that, should they win, they have 60 days to claim their prize. They suggest using that time to get lots of financial advice before deciding what to do with that prize money.
By the way, the Florida Lottery says Powerball tickets are selling at a rate of over 16,000 per minute in Florida.