How Much You'd Win From The Powerball After Taxes
Excited for the Powerball? If so, the prize is currently over $1 billion — in fact, it's coming in at a lot more. Indeed, $1.4 billion is the number floating around the country in anticipation of Wednesday night's Powerball drawing. But everyone knows taxes drastically reduce that number, so a prominent question on every hopeful's mind is how much is a Powerball win after taxes?
The $1.4 billion prize is only eligible before taxes to those who take the annuity option. This means the first payment comes right away (within two weeks), and all subsequent payments are received at a rate of one per year for the next 29 years. However, for winners who choose the cash option, the payment is received in one large payment within a few weeks of winning, but it would only amount to $868 million before taxes. Even so, it's not quite that simple with tax rates fluctuating each year and a costly difference (of tens of thousands) for those who collect as a couple instead of as an individual.
For instance, if a winner chooses the annuity option and dies before collecting every payment (which is definitely possible if the winner is on the older side), the current value of the remaining payments is included in that person's taxable estate for federal estate tax purposes. Furthermore, there may also exist one or more state tax hits, which heirs to the fortune would pay before they receive any money. Of course, depending on the state, one may move to a low or no income tax state to pay less — but this typically is not the case. Some states do not allow this move.
Big winnings are taxed at the federal tax rate of 39.6 percent, so on $868 million, that amounts to roughly $344 million. No big deal. The federal government does withhold 25 percent of the winner's check before the winner ever sees that money, which, on $868 million, leaves $127 million owed to the feds at tax time. In other words, the recipient would pay the income tax on the lump sum up front. If a resident of highly-taxed New York City wins and takes the lump sum, the government will withhold nearly 40 percent. This also occurs with annuity payments, though at a smaller rate each year.
If the state is a high personal income tax state, the winner could owe up to 12 percent — like in Massachusetts — or an additional $104 million in taxes! New York City residents are also among the highest taxed, with New York State at 8.82 percent, and an additional municipal tax for New York City residents at 3.9 percent — adding up to over $110 million in income and municipal taxes, and a $495.8 million cash prize. That's a little over half of the listed prize. Ouch. Luckily, most states range from a 5 percent to a 10 percent income tax rate, and Florida, Texas, and Nevada (the latter of which does not participate in Powerball) do not tax income on individuals. According to Powerball.com:
The amount of income tax will vary, but it will likely be somewhere close to half the cash amount (counting federal and state taxes). With $50 million as a cash prize, a cash winner will have less than $30 million to invest.
Ultimately, the biggest discrepancy depends on whether taxes are taken out of a lump sum of money, or the annuity payments — in either case, winners should make sure to hire a few financial experts to help their cause before making any rash decisions in the 60 days that follow. Good luck!