With no one hitting all winning numbers in Wednesday night’s Powerball drawing, the top prize has surged higher again.
Now at $495 million, the jackpot has been climbing since late December. And while the odds of winning it are stacked against players, the IRS — and often the state where you live — wastes no time getting at least a slice of every big lottery win.
“Winners are surprised by how much is withheld in taxes from the initial payment, and then how much more is owed when they file their taxes the following year,” said Jason Kurland, a partner at Rivkin Radler, a law firm in Uniondale, New York.
“All of the numbers involved in these huge jackpots are staggering, and the taxes are no exception,” said Kurland, who helps big lottery winners navigate their windfall.
The chance of winning the Powerball jackpot is about 1 in 292 million.
Of course, at some point, there will be a jackpot winner. And whether the person 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 marginal tax rate of 37 percent means the winner would owe a lot more.
For Saturday night’s drawing, the cash option — which most winners go with — is $300.2 million. The 24 percent withholding would reduce that by $72 million.
Assuming the winner had no reduction to their taxable income, another 13 percent, or $39 million, would be due to the IRS ($111 million in all).
And that’s before state taxes. That levy ranges from zero to more than 8 percent, depending on where you live and where you bought the ticket.
In other words, you could pay north of 45 percent in taxes altogether.
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.