It’s the moment you’ve always dreamed about. You check your ticket not once, but twice. You realise you’ve matched every number drawn. You scream, you jump up and down and then recheck your numbers. You’re the latest Powerball winner!
So, what happens next?
Once you come back down to earth, you may just realise that you won’t go home with the exact jackpot amount.
One of the best ways we can explain how much you walk away with is to talk about the $700 million US Powerball jackpot that was won back in January 2017.
That windfall was the second-largest in Powerball history. Yet, the winner received much less than the total that was advertised.
This is how it works:
>A single winner stood to receive the full $700 million only if they opted for an annuity, paid out over a period of 29 years.
Most winners, however, prefer the lump sum option, which would gross at $443 million.
That’s due to taxes.
The federal government takes a 25% cut of your winnings (while foreigners are taxed a hefty 30%). That would leave you with “just” $308.8 million in your pocket. If you pick the annuity option, that’s $17.5 million per year.
So, if the winner chose to take home a lump sum, he or she received a payout of $443 million – that’s a mega 63% of the $700 million advertised.
But, it doesn’t stop there. It all depends on where the winner lives. Some states tax an additional 8.82%, leaving the winner with a total of just over $293 million.
That’s why it’s important to note that the jackpot advertised each week is an estimated total windfall. It’s not your final tax burden since there’s federal tax to consider along with state taxes that vary from the percentages you’ll find on their sites. For instance, players in New York City are subject to further municipal taxes of around 3% of their winnings.
We all know there’s no getting around tax. But, donating some of your prize money to charity might help a little.
In fact, there’s no limit placed on how much of your winnings you can donate. Typically, the IRS limits your tax deductions from charitable donations to around 50% of your income.
In other words, you could donate your entire Powerball jackpot to a charity of your choice and still have to pay taxes.
This differs for Canadian, players though. One lucky player in Calgary won a $40 million jackpot on Lotto Max back in 2013. He decided to donate all his winnings to charity. According to the Canada Revenue Agency, Canadians don’t have to report or pay taxes on a lottery win.
How to Deal with Your Windfall
Now you have an understanding of the strings attached to your dream jackpot, what can you do?
American players have a few options:
Let’s face it, we all dream of winning a massive jackpot in the next Powerball draw, don’t we?
The thing is, the tax burden associated with your windfall can add up. Big time.
Before you decide whether to take a lump sum or an annuity payout, you need to find out what it’s worth and what it’s going to cost you. Overall, when you win something, it’s up to you to pay taxes on it.
As a rule, you’re required to pay taxes in the year you receive your prize, so that’s something else to consider.
The best tip we can give you is not to do anything rash or head off on a spending spree before you’ve sat down with a wealth management or financial expert and done some serious goal setting. This includes the way in which you want to receive your winnings.
Winning the lottery is what dreams are made of. Just make sure you consider the financial implications and reach a decision that will have the most positive impact possible on your long-term finances.
Fail to do so, and your win could turn into a losing proposition.