Are you feeling lucky? The Powerball jackpot keeps growing and has reached a massive $1.4 billion. But before you starting making plans to spend and give that much money away, remember that the tax bill would take a chunk of your winnings.
But how are lottery winnings taxed?
Lottery winnings are taxed as income at both the state and federal levels. The federal tax laws automatically apply a 25 percent income tax withholding to all lottery winnings. However, it wouldn’t stop there.
Big prizes like the current jackpot are taxed at the at the maximum federal income tax rate of 39.6 percent, which means a large portion of your payout would go to your old friend Uncle Sam.
The state taxes you would pay depend on which state you live in, with rates as high as nearly 9 percent and as low as zero.
In fact, the state with the highest lottery winnings tax is New York, with a rate of 8.82 percent. The good news for California residents is that The Golden State is one of ten that do not charge any taxes on lottery winnings.
In addition to federal and state taxes, people could also be subject to local tax withholdings.
Is there any way to reduce the tax bill?
Of course, if you ask any estate planning attorney, he or she will say that there is always a way to reduce a tax bill. In this case, if you chose to give away part of your winnings to charitable organizations you would end up paying a much lower tax bill than someone who spent their winnings on expensive homes, planes, boats and cars.
The Washington Post pointed out another interesting fact about the Powerball jackpot, which is that the prize is only $1.4 billion for winners who opt to take their winnings in equal payouts over the course of 30 years. For those who choose to take their prize all at once, the payout would only be $868 million.
But who wouldn’t be thrilled to walk away with $868 million minus federal, state and local taxes?