As the tax reform debate begins to heat up, businesses and investors are beginning to pay closer attention to the House GOP Tax Reform Blueprint, a tax plan released last June by Speaker Paul Ryan and House Ways and...
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- Pretend You Won the Powerball. What Taxes Do You Owe?
Pretend You Won the Powerball. What Taxes Do You Owe?
Update: The Powerball jackpot increased to $1.6 billion before the drawing, with a cash equivalent of $983.5 million. That increases the federal withholding amount to $246 million with another $144 million due when the winners file their tax returns. The winners are in located in California, Tennessee, and Florida, three states that do not tax lottery winnings. This leaves a true take of $594 million.
The Multi-State Lottery Association just upgraded tomorrow's Powerball jackpot to $1.5 billion, with a day to go. Yes, I've bought my tickets notwithstanding convincing evidence that the 1 in 292 million odds of winning make it essentially impossible.
But say you won and wanted to know your tax liability? Taxes are a big bite of the jackpot, and that doesn't even count the roughly $1 billion in lottery operation "profits" already going to spending programs (usually education) for the Powerball member states. But of the $1.5 billion number that everyone is throwing around, how much do you actually take home?
First you should definitely know that lottery winnings are taxed just like any other income – in this case, at the top federal and state income tax rates. Initially, the winner will have 25% withheld for federal taxes plus the state withholding tax (which in many states is the income tax rate but can be as little as zero in states like California or Pennsylvania, which do not tax lottery winnings). (This will be the state where you are domiciled - where you live and work. If you bought the ticket in a different state, be ready for them to battle over your tax money.) Then, when the winner files his or her taxes next April, they will have to pay the difference between what was withheld and what they owe.
So the current jackpot is $1.5 billion, assume a winner in a state with a 6% income tax who takes the lump sum rather than the annuity (although Josh Barro argues convincingly why you should take the annuity), and that the jackpot is not split between multiple winners. The lump sum option is $930 million, and $232 million will be withheld immediately for federal taxes and $56 million for state taxes. So the winner gets a check for $642 million, but will owe another $136 million when they file their federal taxes. (This number can be reduced a lot if the winner gives a large amount of his winnings to charity before the end of the year, but let's assume the winner doesn't do that.) That leaves $506 million in true take-home after taxes, or about 33% of the $1.5 billion.
Additionally, non-charitable gifts of more than $14,000 a year or $5.45 million over a lifetime are taxed at the gift tax rate of 40 percent, so that should be kept in mind when the winner gives anything away to friends, family, or strangers. Also, whatever you spend your money on will be subject to state sales taxes, which average about 7 percent.
And, of course, if you are the winner, please give the Tax Foundation fundraising office a call! We are a 501(c)(3) charitable organization, get no government funding, and our non-partisan analysis of tax issues depends on support from generous contributors.
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