The dream of winning a life-changing amount of money on Powerball spurs millions of players into entering the game twice a week. However, it is not just a case of looking at the advertised jackpot amount or the fixed value of the prizes in the other eight tiers to see how much you would receive if you won, as Powerball prizes are taxed.
The tables below show the obligations for federal tax across the USA and each jurisdiction's own requirements.
|Prize||Federal Tax Obligations|
|$600.01 - $5,000||Winnings must be reported on federal income tax form|
|$5,000.01 and above (not including the jackpot)||25%|
|No state tax on lottery prizes||California, Florida, New Hampshire, Puerto Rico, South Dakota, Tennessee, Texas, U.S Virgin Islands, Washington State, Wyoming|
|4%||Colorado, Missouri, Ohio, Oklahoma, Virginia|
|5%||Arizona, Iowa, Kansas, Louisiana, Maine, Massachusetts, Nebraska|
|6%||Georgia, Kentucky, New Mexico, Vermont|
|7%||Arkansas, South Carolina|
Federal withholding rules are consistent across the United States and apply to all Powerball winnings of $600.01 and over. While winners of smaller prizes do not have to worry about missing out on some of their cash, the Internal Revenue Service (IRS) must be notified of any single prize greater than $600. Anyone who claims a prize of between $600.01 and $5,000 is required to report their winnings on their federal income tax form and will be issued a W-2G form.
A federal tax of 25 percent will be withheld on all prizes above $5,000 (including the jackpot) before players receive their winnings. Players who win the jackpot will have to pay a total of 39.6 percent in federal tax. 25 percent is paid immediately, and the remaining 14.6 percent is paid at the start of the next tax year. In addition, if a player that wins the jackpot does not have a Social Security number, they will have to pay a federal tax of 28 percent, instead of the 25 percent and foreigners are subject to federal tax of 30 percent as well as the remaining 14.6 percent.
Players who win the jackpot can also decide whether to take a one-off cash lump sum or accept annuity, which consists of 30 annual payments over 29 years. The annuity option works out as a significantly larger amount, but is still liable for tax. A W-2G form will be issued along with each winner's check to show that the 25 percent federal tax has already been paid.
The annuity amount is larger because the winner will receive the money in the jackpot prize pool as well as the interest it earns, whereas players who choose the cash option are just getting the current amount that is available. Visit the page on Cash vs Annuity to find out more, including the main points in favour of each option.
As well as federal withholding, players will also need to be aware of the tax regulations for lottery winnings in their own state. While some states have no tax on lottery prizes, other jurisdictions will have their own specific tax obligations. For example, Delaware used to not levy state taxes on lottery prizes, but now winners are obligated to pay income tax on applicable prizes.
Players should also be aware that if they have won a Powerball prize with a ticket bought in a different state, they will still need to pay state tax at the rate of whichever of the two jurisdictions is the higher. It is therefore important to remember that the tax will not only vary by state but also depending on each individual's own unique circumstances.
Whether it is wages or a lottery win, whatever money you receive in a tax year is subject to federal and state tax and everyone's situation will be different. As taxation issues can be complicated and vary greatly from person to person, it is recommended that anyone who wins a big Powerball prize speaks to a professional financial expert.