After Saturday night’s drawing came and went without a winner, the Powerball jackpot has ballooned to a staggering $1.04 billion (yes, billion with a b.) The next drawing is Monday, Oct. 3 and according to the Multi-State Lottery Association, it’s the fourth largest jackpot in Powerball history.
The last Powerball winning ticket was sold in California on July 19. Since then, there have been 32 consecutive drawings without a Powerball lottery winner.
While the odds of becoming a Powerball winner are slim (1 in 292.2 million to be exact), it’s hard to resist daydreaming about what you’d do with all that money. But how much of the lottery prize would you take home after taxes? We’ll break it down – and suggest five ways to safely invest your windfall.
How are lottery winnings taxed?
No matter how lucky you are, Uncle Sam will still come knocking. The IRS taxes lottery prizes differently depending on how the winner chooses to get paid. You have two choices: lump sum payout or annual payments spread over 30 years. In truth, most lottery winners opt for the cash lump sum upfront, even though it ultimately means fewer dollars in their pocket.
What do federal taxes look like on a lump sum payment? The federal tax rate on any prize over $5,000 is 24%, which gets immediately deducted from your winnings. And for a large prize like the Powerball, that lump sum will also catapult you into the highest income tax bracket, so you’ll pay the top federal tax rate of 37% the following year.
The annuity option gives you the whole $1.04 billion pot over a longer time span, but you’ll still see that 24% taken off the top of every payment. And for gigantic lottery prizes like the Powerball, you’ll also be in the highest federal income bracket come tax time and have to pay any federal taxes you owe beyond that withholding.
There’s also the state tax bill
Just when you thought your windfall was safe, here come state taxes. How much you’ll pay in state income taxes depends on where you live. New Yorkers pay the highest state tax rate at 13%, but the applicable state tax rate across the country varies from 2.9% to 8.82%.
Of course if your luck holds, you might find yourself in one of the following states that doesn’t charge state tax on income:
Alaska
Florida
New Hampshire
Nevada
South Dakota
Tennessee
Texas
Wyoming
Washington
What would you pocket after paying Powerball taxes?
Counting your chickens before they hatch might be bad luck, but let’s say you win that billion-dollar jackpot. If you choose the lump sum payout, you’ll be paid $478.2 million up front.
However, because your winnings are also subject to a 24% tax withholding, that cash value means you’ll only walk away with $363.4 million to put in the bank. Depending on your filing status the following year, that sum is also subject to a tax rate as high as 37%, which means that money dwindles down significantly before you even file your state tax return.
If you’re willing to wait for three decades, the annual payments start at nearly $16 million the first year and increase by 5% every year, topping $64 million by year 30. That’s before federal taxes.
If you want to run the numbers and see the fine print, you can use the Powerball Taxes Calculator to learn more.
5 investments that make lottery winnings pay off
Enough with the tax talk. Let’s say you hit the jackpot (literally) and have joined the billionaires club. Here’s what experts say lottery winners should do to maximize the winnings and secure a less stressful financial future.
1. Hire a financial adviser
Before you even roll up to claim the check, it makes sense to hire a financial adviser and a tax attorney or accountant who can help you manage your tax liabilities and invest money wisely.
2. Diversify your banking strategy
You might think you’re being responsible for stashing money in the bank, but remember banks are only insured for deposits up to $250,000. So be intentional about where you’re putting your money and how you’re splitting it up.
Learn more about high-yield savings, money market, and CD savings accounts.
3. Pay off outstanding debts
It’s going to be a big relief to live debt-free, potentially for the first time. Paying off outstanding loans like mortgages or credit card debt is generally a smart idea as it prevents interest from accumulating. However, keep an eye on your credit scores before leaning into living off cash on hand.
4. Invest wisely
Having extra income might tempt you to try new investment strategies, but be careful about jumping feet first into financial products you don’t understand. Stick with low-risk investments like bonds and safer stocks or equities for the first few months before branching out – and get educated about the power of compound interest.
5. Consider establishing a charitable foundation
While you might choose to keep the fact that you won the lottery quiet, family and friends will inevitably find out. It’s helpful to have a charitable foundation set up to deal with requests or gifting strategies that won’t incur an additional tax burden.
And last but not least, if you do win the Powerball, put your winnings to work living the dream without worrying about your bank account balance.
