Powerball take-home depends highly on taxes where you live

Powerball take-home depends highly on taxes where you live


4 photos
Save Story
Leer en español

Estimated read time: 3-4 minutes

This archived news story is available only for your personal, non-commercial use. Information in the story may be outdated or superseded by additional information. Reading or replaying the story in its archived form does not constitute a republication of the story.

DES MOINES, Iowa (AP) — Taxes can eat up close to half a Powerball jackpot, but the amount taken out can vary widely depending on where a winner lives — meaning state and local taxes can mean a difference of tens of millions of dollars.

To start, all winners must pay federal income taxes. The U.S. government requires 25 percent to be withheld off the top if the winner supplies a Social Security or tax ID number. If a winner doesn't have such a number — yes, non-citizens can win the lottery — the IRS withholding rate is 28 percent. That's to guarantee they get at least part of their share.

But the eventual federal tax bill will be higher, because the winner will have to claim the prize on their income taxes and pay the difference between what was already withheld and the top rate of 39.6 percent.

A single winner of Saturday's record $800 million Powerball jackpot who chooses the lump sum option would have $496 million before taxes. After paying $196.4 million in federal taxes, the winner would have $299.6 million. From here, it's all about location.

Winners in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming really hit the jackpot, because they have no state personal income tax. Winners from California and Pennsylvania may also get to keep more of the money, since those states exempt lottery winnings from state income taxes if the ticket was bought in the state.

But most winners will have a state tax bill to reckon with.

"If you win it in New York City, that's where you're going to come out taking home the least," said Gerald Prante, an economics professor at Lynchburg College in Lynchburg, Virginia.

New York City winners will pay the state tax of 8.8 percent and the city tax of 3.9 percent, Prante said. Combined with the federal rate, a city resident ends up paying 48.5 percent of the winnings in taxes, taking home $255.6 million. That means, Prante said, when you factor in state rules about deductions, that a New Yorker could pay $44 million more in taxes than a California winner.

Hawaii has one of the highest state income tax rates at 11 percent, but a resident would have to buy the ticket elsewhere, since the state doesn't sell Powerball tickets. A winner there, Prante said, would take home about $260 million.

Powerball tickets are sold in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Five states besides Hawaii — Alaska, Alabama, Nevada, Mississippi and Utah — do not participate.

Lottery officials typically advise large jackpot winners to contact attorneys and tax experts before cashing in a ticket, because tax policies vary by state, and consider strategies for setting up trusts and managing investments.

Donating money to tax-deductible charities is one strategy to reduce taxable income. But giving money to relatives or leaving it as part of an estate may present the opposite problem, eating up even more of the money in estate, inheritance or gift taxes.

To save on taxes, a winner could take the annuity payment instead of the lump sum and spread the tax burden over 29 years. Powerball jackpots are always advertised in the amount won before taxes taken as an annuity paid out over time — thus the $800 million. No one takes that much home.

"Almost everyone chooses the lump sum, but you do take a pretty significant hit," said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting. "I guess people just feel they can do better than waiting 30 years to get all their money."

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Photos

Most recent Business stories

Related topics

Business
DAVID PITT
    KSL.com Beyond Series

    KSL Weather Forecast

    KSL Weather Forecast
    Play button