The Multi-State Lottery Association said that a California ticket matched all six numbers on Wednesday night, receiving the third-largest Powerball jackpot ever. Last-minute ticket sales raised the reward to $1.08 billion.
The winner must choose a 30-year $1.08 billion annuity or a $558.1 million lump payoff, both pretax estimates. Even though both alternatives involve high taxes, experts recommend planning for this life-changing windfall.
John Loyd, a certified financial planner and registered agent at The Wealth Planner in Fort Worth, Texas, urges winners to take their time and not act on emotions.
California lottery winners are tax-free. If the winner lives outside California yet bought the ticket in California, state taxes may exceed 10%.
The winner’s tax burden depends on numerous factors after the 24% upfront federal withholding reduces the lump payment option by $134 million. This withholding may not cover the receiver’s 37% top federal income tax bracket.
With Powerball fever sweeping the nation, Friday night’s Mega Millions jackpot is estimated at $720 million, offering another chance for life-changing prizes with odds of 1 in 302 million.
Experts advise meeting with tax, financial, and estate planners shortly after winning the jackpot. Wealth preservation and tax
reduction are goals after a windfall.
Certified financial planner John Chichester Jr., CEO of Phoenix-based Chichester Financial Group, notes that 30-year annuity winners may have more tax planning options.
After 2023 inflation changes, federal income tax bands are significant. Despite larger brackets, lottery winners may fall within
the 37% bracket.
In 2023, single filers with $578,126 or more taxable income and married couples with $693,751 or more pay 37%. Taxable income is adjusted gross income minus standard or itemized deductions.
Taxable income isn’t all 37%. Single filers pay $174,238.25 + 37% above $578,125. Married couples filing jointly owe $186,601.50 + 37% of the amount over $693,750.
After 24% federal withholding, the jackpot winner may owe millions.
The winner’s location and ticket purchase may affect state taxes. Some states do not tax income or lottery prizes, while others have high-income tax bands over 10%.
As Powerball captivates the nation, Tuesday night’s Mega Millions drawing boasts a $640 million jackpot and odds of 1 in 302 million.