The Powerball jackpot has ballooned to an estimated $1 billion, raising the stakes for the next drawing at 10:59 p.m. ET on Wednesday night.
It’s the third-biggest prize in the game’s history — falling behind the record $2.04 billion jackpot in November and $1.586 billion prize from 2016, according to the Multi-State Lottery Association.
However, the windfall shrinks dramatically after the IRS collects its share of the prize, and state taxes could further reduce winnings.
If you win, there are two choices for the payout: a lump sum of $516.8 million or 30 years of annuitized payments worth $1 billion. Both options are pretax estimates.
“I’m typically a fan of taking the lump sum,” unless someone prefers the annuity for cash management purposes, said certified financial planner and enrolled agent John Loyd, owner at The Wealth Planner in Fort Worth, Texas.
The reason: You can maximize the winnings by investing the lump sum proceeds sooner, according to Loyd.
Plus, the top federal tax bracket, which currently stands at 37%, could get higher over time, he said. Without changes from Congress, the 37% rate automatically reverts to 39.6% after 2025 when provisions from the Tax Cuts and Jobs Act sunset.
The chances of winning Powerball’s grand prize are 1 in about 292 million.
More than $124 million immediately goes to the IRS
Before seeing a penny of the jackpot, winners pay a sizable tax withholding. Winnings above $5,000 require a 24% mandatory upfront federal withholding that goes straight to the IRS.
If you pick the $516.8 million cash option, the 24% withholding automatically reduces your prize by about $124 million.
However, Loyd warns the 24% withholding won’t cover the entire tax bill because the prize pushes the winner into to the 37% tax bracket.
How federal tax brackets work
Millions in lottery proceeds easily put the winner in the top federal income tax bracket — but that doesn’t mean they’ll pay 37% on the entire prize.
For 2023, the 37% rate applies to taxable income of $578,126 or more for single filers and $693,751 or higher for married couples filing together. You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
Single filers will pay $174,238.25, plus 37% of the amount over $578,125. As for married couples filing together, the total owed is $186,601.50, plus 37% of the amount above $693,750.
After the 24% federal withholding, the jackpot winner’s tax bill depends on several factors but could easily represent millions more.
You may also owe state taxes, depending on where you live and where you purchased the ticket. Some states have no income tax or don’t tax lottery winnings, but others have top-income state tax brackets exceeding 10%.
Powerball isn’t the only chance to strike it rich. The jackpot for Friday night’s Mega Millions drawing now stands at an estimated $720 million. The chance of hitting the jackpot in that game is roughly 1 in 302 million.