Here’s what the $1 billion Powerball winner could owe in taxes

The Powerball jackpot has ballooned to an estimated $1 billion, elevating the stakes for the subsequent drawing at 10:59 p.m. ET on Wednesday evening.

It is the third-biggest prize within the recreation’s historical past — falling behind the file $2.04 billion jackpot in November and $1.586 billion prize from 2016, based on the Multi-State Lottery Affiliation.

Nevertheless, the windfall shrinks dramatically after the IRS collects its share of the prize, and state taxes may additional cut back winnings.

When you win, there are two decisions for the payout: a lump sum of $516.8 million or 30 years of annuitized funds value $1 billion. Each choices are pretax estimates.

“I am sometimes a fan of taking the lump sum,” until somebody prefers the annuity for money administration functions, stated licensed monetary planner and enrolled agent John Loyd, proprietor at The Wealth Planner in Fort Price, Texas.

The explanation: You possibly can maximize the winnings by investing the lump sum proceeds sooner, based on Loyd.

Plus, the highest federal tax bracket, which presently stands at 37%, may get larger over time, he stated. With out adjustments from Congress, the 37% price robotically reverts to 39.6% after 2025 when provisions from the Tax Cuts and Jobs Act sundown.

The possibilities of profitable Powerball’s grand prize are 1 in about 292 million.

Earlier than seeing a penny of the jackpot, winners pay a large tax withholding. Winnings above $5,000 require a 24% necessary upfront federal withholding that goes straight to the IRS.

When you decide the $516.8 million money possibility, the 24% withholding robotically reduces your prize by about $124 million.

Nevertheless, Loyd warns the 24% withholding will not cowl your complete tax invoice as a result of the prize pushes the winner into to the 37% tax bracket.

Tens of millions in lottery proceeds simply put the winner within the high federal revenue tax bracket — however that does not imply they will pay 37% on your complete prize.

For 2023, the 37% price applies to taxable revenue of $578,126 or extra for single filers and $693,751 or larger for married {couples} submitting collectively. You calculate taxable revenue by subtracting the higher of the usual or itemized deductions out of your adjusted gross revenue.

Single filers pays $174,238.25, plus 37% of the quantity over $578,125. As for married {couples} submitting collectively, the full owed is $186,601.50, plus 37% of the quantity above $693,750.

After the 24% federal withholding, the jackpot winner’s tax invoice relies on a number of elements however may simply signify hundreds of thousands extra.

You might also owe state taxes, relying on the place you reside and the place you bought the ticket. Some states don’t have any revenue tax or do not tax lottery winnings, however others have top-income state tax brackets exceeding 10%. 

Powerball is not the one probability to strike it wealthy. The jackpot for Friday evening’s Mega Tens of millions drawing now stands at an estimated $720 million. The possibility of hitting the jackpot in that recreation is roughly 1 in 302 million.