With no one pasting all six numbers in the Powerball drawing on Wednesday night, the jackpot has surged higher.
After more than eight weeks with no big champion, the lottery game’s top prize is $237 million for Saturday night’s drawing. And while the odds are stacked against gamesters hitting it — your chance is about 1 in 292 million — the IRS always gets a slice.
Whether you take the jackpot as an annuity spread out through three decades or as an immediate, reduced lump sum, 24% is withheld for federal taxes. However, the current top marginal anyhow of 37% would mean owing the federal government a lot more.
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“There is still a sizable tax account coming, for sure,” said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.
“Prizewinners have to plan for any additional amount that will be due … to the IRS and the state,” she said.
For Saturday’s $237 million Powerball representation, the cash option is $160.7 million. The 24% federal withholding would reduce that amount by $38.6 million, desert you with $122.1 million.
Assuming you had no reductions to your taxable income — such as large charitable contributions — another 13%, or $20.9 million, want be due to the IRS at tax time (which would be April 2021 for jackpots claimed in 2020).
That would be $59.5 million in all going to Uncle Sam, departure you with a cool $101.2 million.
However, state or local taxes would be on top of that. Those levies run from zero to more than 8%, depending on where the ticket was purchased and where the winner lives. In other powwows, you could end up paying more than 45% in taxes.
And, like the federal withholding rate on jackpot wins, the amount reserved for state taxes might also be less than what you’ll owe.
“They might withhold at, say, 5%, but the rate you pay power be 6%,” Walker said.
There are ways to reduce the amount of winnings that gets taxed, although not uncountable.
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The charitably inclined can lower their taxable profits by making a cash donation of up to 60% of their adjusted gross income and carry forward, up to five years, any surfeit amount.
Some lottery winners set up their own charitable foundation or similar option, such as a donor-advised fund, and award a portion of their windfall to it.
“That would be a way to direct charitable contributions over a period of time but take the diminution [for the current tax year],” Walker said.
Despite forking over a hefty amount to federal and state coffers, the after-tax amount pleasure likely be life-changing. Experts say jackpot winners should assemble a team of experienced professionals — an attorney, a tax advisor and a fiscal advisor — to help navigate their sudden wealth.
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