Whether the windfall is taken as an annuity of 30 payments over 29 years or as an immediate, reduced cash lump sum, taxes end up taking a big bite out of any winnings.
For this $1.02 billion jackpot, the cash option — which most winners choose — is $602.5 million. A mandatory 24% federal tax withholding on that amount would reduce your winnings by $144.6 million.
However, because the top federal marginal tax rate is 37% — which applies to income above $539,900 as a single taxpayer or $647,850 for married couplesfiling jointly — you could expect to owe more at tax time.
One way to reduce your tax bill is to think charitably, according to the American Institute of CPAs: You can contribute cash, up to 60% of your adjusted gross income, to a public charity or a donor-advised fund and get a tax deduction for the amount in the year you make the donation. You could also create a private foundation, donate income to it and then determine over time how to deploy the money.
If you had no reduction in income, another 13%, or $78.3 million, would be due to the IRS ($222.9 million in all).
That would reduce the windfall to $379.6 million.
There also could be state taxes either withheld or due. Unless you live where there’s no income tax or lottery wins aren’t taxed, those levies could be more than 10%, depending on where you bought the ticket and where you live.
Nevertheless, even after a big tax bill, the windfall would be more than most people see in a lifetime. It’s recommended that jackpot winners assemble a team of professionals to help navigate the claiming process, including an attorney, financial advisor and tax advisor.
Meanwhile, the Powerball jackpot is an estimated $145 million for Wednesday night’s drawing. Your chance of winning the top prize in that game is about 1 in 292 million.