The Powerball jackpot keeps on climbing to tantalizing and record-breaking heights, with the latest reports indicating that the grand prize now stands at a cool $1.5 billion. And even though most people realize that the odds of actually winning are infinitesimally small, millions of eager individuals across the country continue to snatch up tickets in an effort to strike it rich.
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Only thing is, the lucky winner won’t actually be as rich as the billion dollar prize would otherwise have you believe. The final take-home amount depends on a number of factors, including what state the winner resides in and whether they choose to take their winnings in one lump sum or in installments over many years. Either way, the $1.5 billion prize, once the dust settles and the tax man takes his fair share, will be markedly lower.
Here’s what you need to know.
For starters, lotto winnings are taxed like ordinary income. As a result, the upcoming Powerball winner will have to fork over 39.6% (the highest income tax rate) of the winning amount over to the government. If you decide to claim your prize in one lump sum, the prize amount right off the bat is lowered to $930 million. And with the 39.6% tax rate in effect, you’ll only be able to add $561.7 million to your bank account. Not a bad haul by any means, but still far from approaching billionaire territory.
And because the government doesn’t want to wait until April to enjoy some of that lotto cash, it automatically withholds 25% of your winnings right off the bat, which is to say your lump-sum check will actually be for $697.5 million, with a looming tax debt of $135.8 million due come April.
But wait! You might still have to fork over a little bit more in state and local taxes depending on where you live.
The states where you won’t have to pay any extra include: California, Delaware, Florida, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
From a tax perspective, New York City is probably the worst place to win the lottery. In addition to a State-wide personal income tax rate of 8.82%, folks in New York City itself will also be on the hook for 3.87% in city taxes as well. Before you know it, your winning sum is now creeping below the $500 million mark. Oh the horror!
A list of other states with particularly high personal income tax rates include Oregon (9.9%), Minnesota (9.85%), Maine (7.95%), and Idaho (7.4%).
Now if you decide to take your prize in annual installments over a period of 29-30 years, which most financial advisors recommend, it’s unclear what your final tax payout will be because the tax rate may be subject to change over time.
Nonetheless, the bottom line is this: if you win the lottery you’ll most certainly be rich, but perhaps not as rich as you initially thought.
And if you’re planning on playing the upcoming Powerball, make sure to check out our piece detailing which Powerball numbers have historically been drawn the most frequently.
As a final point that’s all too appropriate considering the lotto hysteria sweeping the nation, the following quip from Reddit encapsulates the line of thinking that underlies most lotto purchases.
[1 in 4 car accidents are caused by texting and driving] People: “Won’t be me.” [1 in 292 million chance of winning the Powerball] People: “You never know.”