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January 13 2016

How Government Cashes in if You Win Powerball

Patrice J. Lee

Dreaming about becoming a billionaire overnight? The Powerball jackpot may be your ticket.

If you haven’t heard, the enormous haul is $1.4 billion and the numbers will be pulled tonight.

Uncle Sam is counting on there being a winner tonight too because, when someone hits it big, it’s government that cashes in.

If you win – and the odds are stacked pretty high against you – your billionaire status will be short-lived thanks to the chunk of your winnings that Washington, your state house, and your city hall will take.

Let’s say you are tonight’s winner. To be a billionaire and have the Forbes-fabulous life that Travie McCoy sings about with Bruno Mars, you have to take your winnings in 30 payments over 29 years. If you opt for the lump sum, the jackpot is just $868 million (about 38 percent of the original jackpot).

Either way, your first round of taxes kicks in: federal taxes. Uncle Sam carts off the top 25 percent of your lotto haul as lottery winnings are subject to a 25 percent tax withholding if you’re a citizen or resident with a social security number. Foreigners get 30 percent withheld and if you don’t have a social security number, 28 percent. And let’s not forget that lottery winnings are considered ordinary income and subject to top tax bracket.

Next states get their cut. Here’s where residing in a no-tax or low-tax state pays off. Residents of Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming (which all participate in Powerball) do not have a personal income tax. Even California and Pennsylvania exempt lottery winnings from state income tax if you bought the ticket in state.

If you live in New York, Maryland, or Washington, D.C., expect to pay big with as high as an 8.8 percent tax in the Empire State or 7 percent in the nation’s capital.

Finally, some cities and municipalities also impose taxes such as New York City.

CNBC runs the numbers and reports on just what you have left after government comes knocking on your door:

Sorry, Powerball hopefuls, but there's no way you're walking away with the entire $1.4 billion.

...

Of course, the first hit comes even before taxes kick in. That estimated $1.4 billion prize is only if the winner opts to take the winnings in 30 payments over 29 years. If you want the money now in one lump sum, the jackpot is a mere $868 million, a cut of 38 percent.

Next up is the federal tax bill. Lottery winnings are taxed as ordinary income.

"If they win the jackpot, they're going to be subject to the highest federal tax rate of 39.6 percent," said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "It's a lot more significant than folks expect."

...

The U.S. government automatically withholds 25 percent of such large prizes if the winner is a citizen or resident with a Social Security number. For someone choosing the lump sum, that reduces take-home winnings by $217 million...

Winners will have to pony up the remaining 14.6 percent in federal taxes come tax time in April 2017. That's a bill of roughly $126.7 million you don't want to forget about amid early splurges.

...

Depending on where you live and where you bought the ticket, state and local income taxes further reduce the winnings...

Tallied up, a state and local tax bill could shave as much as another 15 percent—$130.2 million—off the lump sum, she said. That reduces your net winnings to as little as $394.1 million. (Those taxes may not be withheld, so factor that in as another tax bill come due next April.)

Plan to make everyone in your family or neighborhood rich too? There are major tax implications as well. The money is considered given to a friend or family member is a gift rather than income and triggers a flat 40 percent gift tax if you gift more than $14,000 per year per person.

Giving to charity can help, but that has tax implications as well.

These calculations highlights just how much our government penalizes high earners. Targeting the so-called one-percent is easy when you’re not one of them. As a tax planner notes, "People like the idea of winning, and they don't like the idea of paying the tax."

We won’t shed too many tears for how “little” the Powerball winner takes home because even after taxes are paid, they will be very rich. That’s no longer billionaire status, but it is certainly more than most people can ever dream of.

IIndependent Women's Forum is an educational 501(c)(3) dedicated to developing and advancing policies that aren’t just well intended, but actually enhance people’s freedom, choices, and opportunities. IWF is the sister organization of the Independent Women’s Voice.​
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