Powerball Winner May Face Mega Tax Bill

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Vicky Graham

The odds of winning the ever-growing Aug. 16 Powerball lottery, currently at $430 million, are roughly one in 292 million. Yet the probability of paying taxes on the jackpot is 100 percent.

The exact amount depends on where the lucky winner resides and whether he or she takes the prize as a lump sum or in installments. But the federal government will take 25 percent off the top—or $68.4 million of the total $237.4 million taxable under the lump-sum options allowed in some states. As for the annuity option, which spreads a total of 30 payments over the course of 29 years, the federal government will take $3.58 million, according to USAMega.com.

Since 2003, only 4 winners out of almost 200 have chosen the annuity option, while the majority opt for the one-time lump sum payment. With annuity payments, jackpot winners are paid the full advertised prize amount, before taxes, as the state lottery purchases U.S. Government Treasury Securities to fund the winnings via interest earned and maturity. With a lump sum payment, the state pays the winner a one-time amount that would have been invested in the annuity alternative.

The annuity option increases the total earnings, in the long run, but the lump sum payout may be the safest choice due to potential tax fluctuations and overall investment advantages, Jared Walczak, senior policy analyst at the Tax Foundation, told Bloomberg BNA Aug. 15. “Not only is there inherent uncertainty about what the tax rates will be in the future, but the difference is likely to be dwarfed by the advantages to be gained by the prudent investment of a lump sum payment,” he said in an email.

Varying State Rates

Nine states, including California and Delaware, don’t tax lottery winnings, while six—Alabama, Alaska, Hawaii, Mississippi, Nevada and Utah—don’t offer lotteries at all. Residents of those states may buy tickets elsewhere, but they may still face taxes on their winnings.

Residents of New York and Maryland pay the most state taxes on lottery winnings, 8.82 percent and 8.75 percent, respectively. New York City residents pay an additional local tax of 3.88 percent.

The lowest taxes are paid by residents of North Dakota, where winnings are taxed at a 2.9 percent rate, and Pennsylvania, at 3.07 percent.

The next Powerball drawing is scheduled for Aug. 16 at 10:59 p.m.

To contact the reporter on this story: Vicky Graham in Washington at vgraham@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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