A single ticket purchased in California matched all six numbers in Wednesday’s Powerball drawing for an estimated jackpot of $1.765 billion! It’s the second-largest Powerball jackpot and U.S. lottery jackpot in history.
The Powerball winner will have the option of receiving $1.765 billion in 30 annual annuity payments or taking a one-time, lump-sum cash payment of approximately $774.1 million.
However, the real payout will be far less than $1.765 billion (or $774.1 million) after federal income taxes are taken out and paid. Uncle Sam is going to take his piece of the pie … but there’s (more) good news for the winner when it comes to state taxes.
So, exactly how much taxes will be taken out of the $1.765 billion Powerball lottery jackpot? And how much will be left for the winner? Read on to find out.
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Federal Taxes on Lottery Winnings—The Basics
Let’s start with some basics on how the federal government taxes lottery winnings, which are considered taxable income.
Federal Tax Rates
First, you should know that the current federal income tax rates run from 10% to 37%. So, depending on the amount of prize money received, the federal tax on lottery winnings can be relatively low or quite high.
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If we focus on large lottery prizes (like Wednesday’s $1.765 billion Powerball jackpot), you can see how easily the highest federal tax rate comes into play. For the 2023 tax year, the top federal tax rate (37%) kicks in if your taxable income exceeds $578,125 and you’re single. If you’re married and file a joint tax return, then the top tax rate applies to taxable income over $693,750. As a result, lottery prizes above the applicable threshold amount will be taxed at the top federal tax rate.
Note, however, that most tax rates are scheduled to rise in 2026 (unless Congress steps in to keep them at the current rate). The top tax rate will jump to 39.6% at that time. This will impact lottery winners who receive payments over a 30-year period, because they’ll have to pay taxes on payments received after 2025 at the higher rate.
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Tax Withholding
It’s also important to realize that, if you win a lottery prize of at least $5,000, 24% of your lottery winnings will be withheld from your payment for taxes and sent to the IRS. This will be applied toward your overall tax bill when you file your federal tax return for the year, so it’s not an additional tax. It’s more like paying part of the tax you’ll ultimately owe in advance.
Form W-2G
If you win at least $600 from a lottery this year, expect a Form W-2G in the mail by January 31, 2024. The form will list your lottery winnings, federal and state taxes withheld, and other information required by the IRS.
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The IRS will also receive a copy of the form. So, make sure you report the proper amount when you file your tax return. If you don’t, the IRS will want to know why the amounts on the W-2G and your tax return don’t match … and you really don’t want to draw the IRS’s attention to your return.
Filing Your Tax Return
When it’s time to file your federal return, you’ll report any lottery winnings as gambling income on Line 8b of Schedule 1 (Form 1040).
If you have gambling income, that means you can also deduct any gambling losses for the year … but only up to the amount of gambling income reported on your return. You also have to itemize to deduct gambling losses, which means you can’t claim the standard deduction on your return. As a result, depending on your standard deduction amount, you might be better off skipping the gambling loss deduction.
Related: 10 Year-End Tax Planning Tips for Ordinary Americans
Taxes on Wednesday’s $1.765 Billion Powerball Jackpot (Oct. 11, 2023)
It’s time to look at Wednesday night’s Powerball drawing for an estimated $1.765 billion jackpot. Approximately how much will the lucky winner get from Powerball after taxes are paid to the federal government? Let’s do some math.
Lump-Sum Payout
Most lottery winners opt for a lump-sum amount. So, if that’s how the winnings from Wednesday’s Powerball jackpot are paid, the winner will pay about $286.4 million in federal taxes on his or her prize money. Don’t forget that nearly $185.8 million (24%) will be withheld from the payout up front, and the winner will have to pay the rest on the 2023 tax return he or she files next year.
If the $286.4 million is subtracted from the $774.1 million lump-sum payment, the winner ends up with about $487.7 million to spend. While that doesn’t sound as nice as $1.765 billion, it’s not too shabby for a $2 investment.
Annuity Option
If the winner selects the annuity option, he or she will receive 30 annual payments of approximately $58.8 million each. In that case, the winner’s annual federal tax bill will be slightly more than $21.7 million for each of the first three years (2023 to 2025)—for a total of about $65.2 million for that period.
Once the rate jumps to 39.6% in 2026 (and assuming it isn’t changed again later), the estimated annual tax for the final 27 years (2026 to 2052) is slightly more than $23 million per year—which comes to a total of about $627.5 million for those years.
So, for all 30 years, the winner can expect to pay a grand total of about $692.7 million. When you subtract that from the $1.765 billion in total payments, the winner is left with approximately $1.072 billion.
Note: All calculations are estimates based on the highest 2023 tax bracket for single filers. Some figures were also rounded up or down.
Which Payment Option Is Better?
After seeing the after-tax amounts above, you might be wondering why most people choose to receive their lottery winnings in a lump-sum. Afterall, isn’t getting $1.072 billion better than $487.7 million?
Not necessarily. The problem with annuity payments is that you have to wait 30 years to get all your money. With the lump-sum option, the winner gets less … but he or she will get it right away. If that money is invested wisely over a 30-year period, the winner will probably end up with far more money in the bank when all is said and done.
Related: Earned Income Tax Credit – How Much, Eligibility + More
State Taxes on Lottery Winnings
States often tax lottery winnings, too. The top tax rates in some states are significant. For instance, tax rates are as high as 11% in Hawaii, 10.9% in New York, and 10.75% in New Jersey.
However, certain states don’t tax lottery winnings—and California is one of them. As a result, assuming the winner lives in California (that’s where the ticket was sold), there won’t be an additional state tax bill to pay in addition to the federal tax described above.
And that’s really good news for the winner, since the California tax rate on income above $1 million is 13.3%, which is the highest state income tax rate in the country.
Wednesday’s Winning Numbers (Oct. 11, 2023)
In case you were wondering, the winning numbers for Wednesday’s drawing were 22, 24, 40, 52, 64, and the (Powerball) 10. The Power Play was 2X.
The next Powerball drawing will be on Saturday, Oct. 14, 2023. The estimated jackpot for that drawing is $20 million ($8.8 million lump-sum cash value payment).
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