US Powerball is one of the world’s lotteries known for a massive jackpot. Many players are drawn to this US opportunity because of the spectacular amount they could potentially win. In fact, the biggest Powerball jackpot is 1.6 billion dollars! It fell in January 2016 and while split between three people, the individual sums were still quite impressive.
This lottery can change your life but have you ever taken the time to think about what you’d actually receive if you win the jackpot? Taxes do apply to the sum and your choice of annuity or lump sum payment is also going to have an impact on your wealth.
Annuity vs. Lump Sum Payments: How do They Compare?
Let’s use an example based on the May 30, 2018 Powerball jackpot. The sum is expected to be 60 million dollars by then. Using the number makes it much easier to determine just how much the lump sum and the annuity payments differ from each other.
A player who opts for the annuity option will receive 30 annual payments. All of them are equal and approximately two million dollars. A 25 percent federal tax will have to be withdrawn. It adds up to 500,000 dollars. There will also be a state tax that’s based on location (more about state taxes will be explained in the coming section of the guide).
Depending on location, a player who opts for the annuity payments can expect to receive anywhere between 45 and 39.9 million dollars out of the advertised 60-million-dollar jackpot.
Lump sum payments are the option of preference for most players because the entire sum will be received at the same time. When it comes to the possibility that makes the most financial sense, however, the lump sum payment is far from the best option out there.
When the lump sum payment option is chosen, the player will receive 35.7 million dollars out of the advertised 60-million-dollar jackpot. Financial experts advise against this choice because it contributes to massive losses.
In the case of annuity payments, there’s an annual increase of roughly five percent that is provided to counter inflation and the higher cost of living. When you opt for annual payments, the state takes the present cash value of the entire jackpot and uses this amount to buy bonds. These are the ones that generate the interest money, hence the maintenance of the jackpot value.
A lump sum payment is slightly over half of the advertised jackpot. The fact that you’ll be taking the entire amount immediately means there are no investment opportunities for the purpose of interest generation over the years. As a result, you will become a millionaire right away but you will be missing out on many additional millions.
Using the above example, a person that opts for the lump sum payment will receive anywhere between 26.775 and 23.740 million dollars on the basis of location and the state taxes that will apply to the jackpot.
State Tax Variations
People living in certain parts of the US are a lot luckier than others when it comes to winning the lottery.
Federal taxes are fixed and the same 25 percent will apply to the Powerball jackpot regardless of location. State taxes, however, can come with a significant variation.
Places like California, Delaware, Florida, New Hampshire, Puerto Rico, South Dakota, Tennessee, Texas, Washington, and Wyoming do not apply a state tax to the lottery jackpot. When you’re done with federal taxation, you’re free to receive your much-awaited cash.
On the other hand, New Jersey and Oregon have some of the highest state income taxes set at eight percent. The situation is worse solely in Washington (there’s an 8.5 percent income tax), New York (8.82 percent) and Maryland (8.75 percent). The other parts of the US have income taxes in the range from zero to eight percent.
Keep in mind that people who are not residents of the respective state and who win a Powerball jackpot there can expect to pay a larger state tax in certain parts of the US (the same applies to non-US citizens who win but in that case, the federal tax will increase from 25 to 30 percent). Most states do keep the income tax the same but there are exceptions.
Arizona, for example, has a five percent state income tax that applies to lottery prizes. When a person who isn’t an Arizona resident wins, the applicable state tax will be six percent.
If you happen to win the jackpot (and we wish you do with all of our hearts!) and you are a financially-responsible person, you should definitely consider having consultations with both an accountant and an attorney. These professionals will give you a better idea about your legal obligations in the aftermath of becoming a millionaire, as well as the opportunities you have for collecting an optimal amount out of the advertised jackpot.
A Few Additional Rules and Considerations
The income tax will be withheld by the state before the lottery prize is handed to the winner. In addition to the taxation burden mentioned above, there could also be some local taxes. In New York, the state tax will apply to everyone. For those living in New York City, however, there will be an additional amount of 3.876 percent withheld in a city tax.
People who owe back taxes or child support may find out that they will receive an even smaller amount. The state will use the lottery to collect such missing payments. Thus, any amount owed will be deducted from the lottery winnings.
These are some of the considerations to keep in mind when choosing the jackpot payment option and calculating what amount you’ll be entitled to.
The most important decision is the one between lump sum and annuity payments. Don’t rush it because emotions are going to be a really bad advisor.
One more thing you may want to consider when determining how to get your jackpot is the so-called “curse of the lottery winner.” Many people who chose the lump sum payment option eventually wasted away all of the millions on yachts, lavish lifestyles, luxurious journeys, and drugs. A sudden change in fortune can have a massive impact on one’s life and this impact isn’t always positive.
Opting for annuity payments will still entitle you to a large enough amount but if you do something stupid, you will know that the next installment will come in one-years’ worth of time. You will have 12 months to collect yourself, reboot and do something great with the Powerball jackpot. Coming in possession of multiple millions isn’t always the best thing for you and your family.
While taxes and bookkeeping issues happen to be one of the most boring things on the face of the planet (currently, we can’t think of anything more boring apart from watching paint dry), this is something you will have to tackle after the initial emotions have subsided. Talk to a professional and try to control your emotions. Once you settle into your new life, you will be thankful for such rational decisions.