The Powerball lottery jackpot soared to $1.08 billion in July. Sold in California, this is the third-highest prize in Powerball history. To this day, $2.04 Billion remains the largest lottery prize in U.S. history. Winning a massive $1.08 billion Powerball might sound like a dream come true, but you might end up going home with just a third of that when you calculate Powerball Jackpot after taxes.
While jackpot wins continue to spike from time to time, the actual odds of winning the Powerball jackpot lottery stand at a low odd of 1-in-292 million. Now, the cool thing is you’ll end up with more money than most people. But it’s also scary because it’s a life-altering moment, and your life could move quickly from simple to complex without expert guidance.
For one, the taxes on Powerball are not so great. It’s like this, if you win the lottery jackpot, you and the IRS are spending the money together! But how much should you expect from your Powerball jackpot after taxes? Read along and find out.
What Are The Taxes On The Powerball?
If you’re a lucky Powerball jackpot winner, you’ll have to choose between a $1 billion payout spread across thirty yearly payouts or a lump sum payment of about $516.8 million. Either way, you’re still paying taxes.
Your jackpot wins are considered taxable income, and this means all winners pay an automatic 24% federal withholding tax on their Powerball lottery wins. This is similar to the required withholding for required minimum distributions from retirement accounts. However, since your tax bracket could be higher because of your jackpot win, you could owe additional levies when it’s time to pay your taxes. You’re likely to pay another 13% in federal taxes when you file your tax return since winning millions of dollars could put you in the top tax bracket of 37%.
What Happens To A Lumpsum Payment?
For a lump sum payment, you’ll get an estimated cash value of $516.8 million pre-tax. You may be looking at a mandatory federal tax withholding of 24%, leaving you with a $392.76 million Powerball Jackpot after taxes, while the IRS walks away with about $124 million. Even more, depending on your taxable income, your winning could drop as low as $325.6 million on a federal marginal rate of 37%. This means another $67.2 million totaling $191.2 (in addition to the $124 million withheld)
All this would leave you with a lesser payout of $325.6 million Powerball Jackpot after taxes, assuming you have no other deductions.
What Happens To A 29 Years Annuity Installment?
If you choose to get paid in installments, the annual payments will average about $33.3 million and could further drop to about $ 21 million on 37% federal taxes. Each future payments are calculated to increase by 5% every year. The payments are usually financed through Treasury bond investment. Since bond values increase with the interest rate on treasury bonds, it means the higher the interest rates, the higher the Powerball installment amount will be.
If a winner dies before all the installment payments are made, the balance of the payment will be made to the winner’s estate.
Sorting State Taxes
After sorting your federal taxes, then you have to move on to the state income taxes, which could range from 2.9% to 10.9%. To a large extent, the amount you take home from a Powerball Jackpot after taxes also depends on the state you reside in. For example, in states like New York, the lottery is taxed at 10.9%. Some cities also tax winnings as well.
If you live in Texas, California, South Dakota, New Hampshire, Florida, Wyoming, Washington, and Tennessee, then you’re in luck, because you won’t have to pay income tax on your lottery winnings.
In addition, five states do not participate in the Powerball Lottery at all: Alaska, Nevada, Utah, Hawaii, and Alabama.
Should You Choose Lumpsum Or Installments?
History shows that without careful planning, winners can lose their newfound wealth just as quickly as they got it and could become bankrupt over time.
If you win the Powerball Jackpot, working with a tax strategist is the best way to protect your win and pay the least amount of taxes possible. Most lottery winners choose the lump sum option, but this path is often the wrong one. Part of the reason for this choice is that they fear that the state or lottery commission could go bankrupt before they’re fully paid. But this is hardly true since the installment payment is backed up by a bond portfolio.
The best way to protect your lottery winnings from high inflation and high tax rate in the future is to choose the annual installment option. Choosing an annuity helps you lower your tax cut and get more Powerball Jackpot after taxes.
With an annual installment, you’ll be receiving the full advertised winning, but a lump sum, on the other hand, only offers a time-value money discount, generally between the mid-30% range but can be as high as 39%. A lumpsum payout will put you on the verge of a 37% federal tax on every dollar over $539,900 for a single filer or $647,850 for joint filers in 2022.
Putting the tax difference between a lumpsum and installment payments in numbers, if you’re taking installment and receiving over $539,900, you’ll save approximately $53,990 every year because of the federal guarantee tax structure. Compiling these savings over 30 years amounts to about $1.6 million in projected savings under the current federal tax rates.
Besides getting more money saved, installment options also give you the opportunity to apply long-term tax and investment planning for your newfound wealth.
In addition, installment payments might allow you to change your location to reduce state taxes on future installments if you live in a state that taxes Powerball winnings- an option that won’t work for a lump sum recipient.
For instance, if you win in a high-tax state such as New York, you would have to pay a 10.75% top marginal rate, but if you choose the installment plan, you could take the first payment at a higher tax rate and then take the remaining installment payments in a lower- taxes state or one without state income taxes such as Texas.
Summarily, annuity or installment payment is the better option for Powerball Jackpot after taxes
because it offers numerous advantages, from multiyear tax planning to having your income spread over 29 years with a minimum 5% return annually, as well as the option to relocate to a lower tax state. Even with inflation lurking in the corner, installment payment helps you maximize your investment and plan your finance to make the most of your Powerball Jackpot after taxes.
Don’t let your newfound wealth overwhelm you by making the wrong financial choice. Reach out to the Tax Goddess team today to maximize your winnings with the best tax-saving strategies.