Powerball Tax Advice (for Winners Only)

The three lucky winners of the record-breaking $1.6 billion Powerball jackpot will need some help with their taxes this year, next year, and probably the years to come.

Andrew Oswalt, a CPA who works for the tax prep software company TaxAct, has some tips for them:

How much will be subtracted from the winnings for taxes?
Lottery winnings are taxed just like regular income. If a one person wins the jackpot, they’ll land in the top tax bracket for both federal and state taxes. On the federal side, that means a rate of 39.6 percent. State and local taxes depend on where the winner lives. Someone in non-taxing states like Florida or Texas truly has lady luck on their side. But other states, say New York, will tax the winnings. Effective tax rates vary by state. Winners should also consider county and city taxes—depending on where he or she lives, more of the winnings may go to taxes.

In addition, the winner may be looking at 25 percent less cash in his or her pocket—that’s because the U.S. government will withhold 25 percent of the prize money since lottery winnings are often subject to regular gambling withholdings. All of these things add up.

Where does lottery tax revenue go?
According to the Multi-State Lottery Association (MUSL), there are 47 lotteries currently selling the Powerball game. All profits from the games are kept by the state that sells the ticket and how they use that money is up to them.

According to information gathered recently by the North American Association of State and Provinicial Lotteries, 15 states use all or substantially all of the lottery proceeds for education. Many states put the money back into the state’s budgets and use it for a variety of purposes, which are often undeclared. The percentage of lottery money that’s earmarked for various projects also varies by state.

How to make the most of the winnings. Should you take the annuity or lump sum? Why?
No matter which option the winner chooses, a good portion will go to taxes. Take the lump sum and you’re looking at a smaller jackpot—only $930 million (divided by three winners, that is), which is taxed at the highest federal tax rate of 39.6 percent. If you choose the annuity, you’re looking at nice, big payments spread out over the course of 30 years. But, unless your crystal ball accurately forecasts tax rates, there’s no way to truly know what you’ll end up paying to Uncle Sam. Since the tax rate over the next 30 years is a great unknown, we err on the side of taking the lump sum. Many past Powerball winners agree—Money magazine reported that 96 percent of Powerball winners elect to take the lump sum payment.