It seems like everyone is rushing to their nearest lottery retailer to buy their shot at the record breaking prize that is estimated to be at least $1.5 billion by the time the lucky numbers are drawn. Even those who don’t normally play the lottery are seen amongst the others waiting in lines for sometimes hours to get their hands on a part of that Powerball dream.
First of all, the $1.5 billion estimated grand prize is only actually $1.5 billion if you choose to receive your winnings in the form of an annual payment over the course of the next 30 years. If you want your winnings all at once, then you will receive the cash value which equals a 38% deduction, making the actual jackpot only worth $930 million.
But before you start spending it all in your mind, you need to take into account federal, state and local taxes. These winnings are considered to be normal income by the federal government, which means the federal taxes that the winner(s) will pay is a whopping 25% right off the top, making the actual jackpot only worth $1.125 billion (or $697.5 million for the lump sum).
Once Uncle Sam has gotten his fair share, then there are state taxes that need to be deducted in many cases. Each state’s tax amount varies, but you can see where your state stands in the table below.
But wait, there’s more!
If you purchase your ticket in certain areas where the Powerball game is played, you could be subject to additional county and even city taxes. Residents of New York City for example will have to pay federal taxes, state taxes, county taxes and city taxes on their winnings.
When all is said and done, the state and local tax bills could cost as much as another 15%, or $139.5 million, off the lump sum.
Non-residents Have To Pay Too
One little known fact about the Powerball jackpot is that you don’t have to be an American citizen to win it. That is causing many Canadians to make a quick trip over the border to purchase their shot at the big money.
Non-US citizens who win the big prize are taxed at a higher rate however. The 25% tax rate only applies to people who reside in the United States and have a Social Security number. Residents who can prove they live here but don’t have a Social Security number (or fail to provide one) will have 28% withheld, and non-US citizens will have 30% taken off the top.
Additional Federal Taxes to Pay
But that’s not all you will have to pay. Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants, says that anyone who wins the jackpot will be subject to the highest federal tax rate of 39.6%. “It’s a lot more significant than folks expect,” she said.
So when does the remaining 14.6% in federal taxes get taken? It doesn’t. But the winner will have to pay it when they file their federal tax returns in April of 2017. That’s an additional $135.8 million to be sure to earmark for Uncle Sam.
Sharing the Joy of Millions
Generosity could result in Powerball winners taking home even less. If you plan to share the prize money, it is best to make that agreement in writing before the numbers are drawn. This includes when you and your best friend buy a ticket “together”, or when the entire office goes in together on a big stack of possible winning numbers.
If an agreement isn’t in place before the drawing, the money is considered a gift rather than income for those recipients. This means that whomever turns the ticket in to be redeemed, will be the one paying all the income taxes as well as any gift taxes resulting from a substantial split.
Fun Powerball Facts
- There are a total of 44 US States that participate in Powerball.
- The Powerball game is drawn twice per week, on Saturdays and Wednesdays.
- There were a total of 18,315,365 non-jackpot winners in the last drawing held on January 9th, with a total of $159,080,965 in prize money.
- In some states, winning the Powerball jackpot also means that you agree to give up certain rights to privacy, with the winner being required to agree to be photographed and named.
- The Multi-State Lottery Association puts the chance of winning this week’s grand prize at 1 in 292.2 million. You are more likely to become President or die from a lightning strike than win with those odds.
- The odds don’t change with a bigger pot or with having more players. They’re strictly based on how many combinations of numbers you can choose. But even if you did buy multiple tickets, you are still more likely to be drafted by the NBA or get attacked by a shark.
- You have a statistically better chance of being killed by a falling vending machine (1 in 112 million) or being struck by both lightning and a meteor (1 in 210 million) than winning this jackpot.
- Wednesday’s $1.5 billion (and climbing) jackpot is nearly three times as large as the previous largest jackpot: the March 2012, $656 million Mega Millions bonanza split by three winning tickets.
- There have been 18 drawings held since November which have all failed to yield a big winner, causing the grand prize to rise to this record sum.
- Estimates of the number of people who go broke within five years of receiving a large financial windfall from a divorce, inheritance or lottery, range from 50 to 70 percent. Don McNay, author of “Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery,” puts that number even higher, with nine out of ten winners blowing their winnings within five years.
The bottom line: To maximize the overall value of your winnings, most financial experts advise taking the lump sum.
Even after taxes, that option can net you more than $1.5 billion over 30 years if you invest it — even in something ultra-conservative like municipal bonds (which are tax free).