When I win the Powerball lottery on Jan. 13, I’ll be doubly lucky. Not only will I be at least $930 million richer (yes, I’m taking the lump sum), but I live in Texas.
That last statement is not just another annoying boast from an obnoxious Texan. It’s acknowledgment that my native Lone Star State has no income tax, so I won’t have to shell out more tax money.
All gambling winnings are taxable
The federal taxes due on lottery winnings are unavoidable. Everybody knows by now that gambling winnings are taxable income.
Everybody, including the Internal Revenue Service, also will know that you’re America’s newest member of the 1%. And Uncle Sam will make sure that you pay up, starting with your first payout if you take the annuity, or from your only big check if you opt for the lump sum.
The Internal Revenue Service automatically withholds 25% from large lottery payouts to cover some of the federal tax due. If you refuse to supply a valid tax identification number, then the amount that the IRS takes goes up to 28%.
Note the reference to “some of the federal tax due.” By picking the correct 6 Powerball numbers, you have been bumped into the top tax bracket of 39.6%. That means that in addition to the 25% tax bite off the top of your lump sum payout, you’ll have to use some of your winnings to pay the rest of the 14.6% tax due the U.S. Treasury.
The total tax bottom line on your $930 million windfall, should you choose the lump sum payout, is about $368.3 million, meaning you only get to pocket nearly $562 million. Not quite the advertised lump payout, but not a shabby amount of money.
No tax due in some states
Of course, that $562 million assumes you, like me, live in one of the 7 states that have no income tax at all. They are Alaska, Florida, Nevada, Texas, South Dakota, Washington and Wyoming. Two others, Pennsylvania and California, exempt lottery winnings from state income taxes
But if you live in a state that does have an income tax, then you’ll owe that tax collector money, too. And most of them, like the IRS, get at least some of their money up front thanks to state withholding.
Most tax due from Big Apple winners
The unluckiest Powerball winners will be folks in New York. They have to hand over 8.82% of the jackpot to the Empire State tax collector.
Winners in the city so nice they named it twice owe even more. On top of the state taxes, New York City collects an additional 3.876% in taxes.
Of course, once you get your big Powerball check, your tax adviser will be there to help you figure all this out.
And yes, you’re right. I did shift in this blog post from talking about just me winning the Powerball to you winning. I’m not just being magnanimous and sharing the lottery wealth. I’m being realistic.
The chances for anyone who buys a ticket or 2 (or more) are not good. With odds of 292 million to 1, I expect to be sitting at my computer on Jan. 14, doing my job and dreaming of winning the lottery the next time there’s a really big jackpot.