Powerball Jackpot Reaches $1 Billion, But Tax Consequences Can’t be Ignored

Jul 15, 2023 | Blog

An Internal Revenue Service tax attorney has learned that ahead of Wednesday’s drawing, the estimated amount of the new Powerball jackpot total is about $1 Billion. According to the lottery, this makes it the seventh-largest prize in the history of this particular drawing. It’s important to understand, however, that the amount of the winnings substantially plummet after Uncle Sam gets his due.

Lottery Windfall Not Immune to Taxes

According to a tax lawyer in San Jose, if you’re lucky enough to find yourself with the winning ticket, there are two avenues through which to manage your sudden gains. You can choose to annuitize your prize, receiving yearly payments that make up a $1 Billion sum total, or take an estimated $517 million lump sum all at once. The annuity payment structure was designed to give winners some flexibility with regard to paying the taxes on such a staggering sum. Accepting it over a period of 30 years is a unique option that the winner may wish to consider. This is because it offers the person a way to manage the tax bill in a more efficient manner, rather than having the entire amount of taxes owed front-loaded into a gigantic lump sum. 

IRS’s Cut Will Top $124 Million

According to a San Jose tax lawyer, the IRS is set to claim approximately $124 million of the current jackpot. This is because there is a mandatory IRS withholding that goes immediately to it, for which the percentage is 24%. This withholding applies to any winnings that top a mere $5,000. Therefore, should the winner decide to take the option of a lump sum of $517 million, Uncle Sam gets $124 million.

Where the Confusion Comes In

Any back-taxes lawyer would probably agree that some confusion comes in when a winner chooses to take the lump sum option. This is because they often believe that after the 24 percent automatic withholding, they are off the hook for any additional taxes. Unfortunately, this is not the case. 

The rate at which lump sums of those proportions are taxed is 37 percent in most cases, meaning the winner will still be responsible for approximately 13 percent more in taxes. This is for the simple reason that winning millions in the lottery automatically places a person’s yearly income at the highest taxable rate of the aforementioned 37 percent. 

Any married couple making more than $693,751, or a single person making more than $578,126, is taxed at this rate. Naturally, some individuals may itemize to reduce their tax bill, but no one is able to itemize millions of dollars of lottery winnings away on their return.

State Taxes Also a Consideration

Additionally, any individual lucky enough to win the entire Powerball amount will also owe state taxes in most cases, depending on where that person lives and the area in which the ticket was purchased. Some states have tax brackets that exceed 10 percent, so this is a very important consideration. 

No one wants to find themselves being audited, but tax audit representation is very important should that eventuality occur. It is always wise to discuss tax bills of this proportion with an IRS tax attorney or other qualified professional to avoid errors, penalties, or unnecessary audits. Contact us for a San Jose tax attorney.