The Powerball jackpot has reached $1 billion by July 19, 2023.
The Powerball jackpot has swelled to an estimated $1 billion, raising the stakes for the next draw at 10:59 PM ET on Wednesday night.
It’s the third largest jackpot in the game’s history — trailing November’s record $2.04 billion and $1.586 billion jackpot from 2016, according to the Multi-State Lottery Association.
However, the windfall shrinks significantly after the IRS collects its share of the prize, and state taxes can reduce the winnings.
If you win, there are two payment options: a lump sum of $516.8 million or 30 years of annual payments of $1 billion. Both options are pre-tax estimates.
“I’m usually a fan of taking the lump sum,” unless someone prefers an annuity for cash management purposes, said certified financial planner and registered agent John Lloyd, owner at The Wealth Planner in Fort Worth, Texas.
The reason: You can maximize winnings by investing the lump sum sooner, according to Loyd.
In addition, the top federal tax bracket, which is currently 37%, could go up over time. Without changes from Congress, the 37% rate automatically reverts to 39.6% after 2025 when the Tax Cuts and Jobs Act provisions expire.
Chances of winning the Powerball jackpot are 1 in about 292 million.
More than $124 million immediately goes to the IRS
Before seeing a penny of the jackpot, the winners pay a hefty tax withholding. Winnings over $5,000 require a mandatory federal advance withholding of 24% that goes directly to the IRS.
If you choose the $516.8 million cash option, the 24% withholding automatically reduces your prize by approximately $124 million.
However, Loyd warns that the 24% withholding won’t cover the entire tax bill because the prize pushes the winner into the 37% tax bracket.
How do federal tax brackets work?
Millions in lottery proceeds easily put the winner in the higher federal income tax bracket — but that doesn’t mean they’ll pay 37% on the entire prize.
For 2023, the 37% rate applies to taxable income of $578,126 or more for single applicants and $693,751 or higher for married couples filing together. You can calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
Individual candidates will pay $174,238.25, plus 37% of the amount over $578,125. For married couples filing jointly, the total outstanding debt is $186,601.50, plus 37% of the amount over $693,750.
After the 24% federal withholding, the jackpot winner’s tax bill depends on several factors but could easily account for millions more.
You may also owe state taxes, depending on where you live and where you purchased the ticket. Some states do not tax income or do not tax lottery winnings, but others have higher income tax brackets that exceed 10%.
Powerball is not the only chance to get rich. The jackpot for Friday night’s Mega Millions draw is approximately $720 million. The chance of winning the jackpot in this game is roughly 1 in 302 million.