Powerball Jackpot Surpasses $725 Million, but Tax Implications Cannot Be Overlooked
The Powerball jackpot has reached an impressive sum of over $725 million, making it the seventh-largest prize in the history of the game, as confirmed by the lottery. However, it is crucial to understand the substantial decrease in winnings due to tax obligations.
In the fortunate event of holding the winning ticket, winners have two choices: they can opt for a lump sum payment of approximately $366.2 million or select the annuitized prize, which distributes the winnings yearly and amounts to $725 million.
Certified financial planner John Chichester Jr., founder and CEO of Chichester Financial Group in Phoenix, highlights the unique advantage offered by the lottery—an option to receive the prize over a 30-year period through annuity payments. This allows for more flexibility in managing the tax burden. By choosing the annuity payment, winners can strategically invest their money in a tax-efficient manner, mitigating the impact of a larger upfront tax bill. Chichester, who is also a certified public accountant, advises considering this option.
The odds of winning the Powerball jackpot are approximately 1 in 292 million, underscoring the rarity of such an achievement.
Before winners can enjoy their multimillion-dollar jackpot, a mandatory 24% federal withholding is required, which is sent directly to the IRS. This withholding applies to winnings exceeding $5,000. If the cash option of $366.2 million is chosen, the 24% withholding automatically reduces the total amount by approximately $88 million. However, it is essential to note that many taxpayers mistakenly assume that the 24% is the final tax obligation, according to Chichester.
Chichester explains that while the 24% is deducted initially, winners are still responsible for an additional 13% at some point. This is due to the fact that lottery winnings often push individuals into the highest federal income tax bracket. In 2023, the 37% rate applies to taxable income exceeding $578,126 for single filers and $693,751 for married couples filing jointly. Taxable income is calculated by subtracting the greater of the standard or itemized deductions from adjusted gross income.
Naturally, the 37% rate does not apply to the entirety of taxable income. For 2023, single filers will owe $174,238.25, plus 37% of any amount exceeding $578,125. Married couples filing jointly will have a total tax liability of $186,601.50, plus 37% of any amount exceeding $693,750. Depending on various factors, the remaining tax bill could potentially amount to millions more.
Additional tax obligations may also arise from state taxes, depending on the winner’s place of residence and where the ticket was purchased. While some states do not have an income tax or exempt lottery winnings from taxation, others impose state tax rates exceeding 10% for high-income earners.
It is worth noting that the Powerball is not the sole opportunity to win a significant prize, as the Mega Millions jackpot for the upcoming Tuesday night drawing stands at an estimated $500 million. The odds of hitting the Mega Millions jackpot are approximately 1 in 302 million.