The Powerball jackpot is at $1.5 billion and rising, easily ballooning to the biggest lottery prize of all time—which actually raises the value of a single ticket. But unless the winner is Puerto Rican (no federal income taxes or territorial tax on gambling winnings), he is also likely to have to pay taxes of equally historical significance.
There are many misconceptions that float around the taxation of lottery prizes. And the truth is the issue is complicated, not just because many consider the lottery to be a regressive tax, but because the amount one pays in taxes depends on a few different factors, most notably including where you live.
Most stories about lottery prize taxes highlight a federal income tax withholding of 25% for winners. But that's not actually the highest bracket of federal income tax. Big jackpots are instead taxed at 39.6%.
If we're talking a cash lump sum, which everyone but four people has taken since 2003, and the takeaway for the current $1.5 billion jackpot is $930 million, the winner must pay $368 million in federal income tax. (That's the tax bill for an American winner. Interestingly, if a Canadian won, only 30% would be withheld, and the amount taxed could be much less because Canada doesn't tax lottery winnings. And yes, Canadians are crossing the border to play Powerball, just like people in Alabama, Utah, and other states that don't offer Powerball are crossing state borders in droves to buy tickets.)
Although the taxes you'd pay with a lump sum payout is much higher per year than the annuity, both options have you firmly in the deep end of the tax bracket. (Though if Ted Cruz, for example, were to win and somehow enacted a 10% flat tax, you'd be glad you picked the annuity.)
Bear in mind that these are only the federal taxes. Unless you live in Florida, New Hampshire, South Dakota, Tennessee, Texas, or Wyoming, where there are no state income taxes, you'll have to cough up a state tax as well.
Here's what you should tack onto your tax budget (in millions) according to the state where you live, courtesy of USA Mega, a site that tracks the numbers.
California No tax on lottery winnings.
District of Columbia $79
Florida No tax on lottery winnings.
New Hampshire No tax on lottery winnings.
New Jersey $28
New Mexico $55
New York $82 (if also in NYC it goes up to $118)
North Carolina $53 million
North Dakota $37
Pennsylvania No tax on lottery winnings.
Puerto Rico No state or federal taxes on lottery winnings.
Rhode Island $56
South Carolina $65
South Dakota No state income tax.
Tennessee Only income tax on income from stocks and bonds.
Texas No state income tax.
US Virgin Islands No tax on lottery winnings.
Washington No tax on lottery winnings.
West Virginia $60
Wyoming No tax on lottery winnings.
In other words, if the winner of the Powerball jackpot lives in New York City, he'd fork over a grand total of $486 million in taxes ($368 million in federal, $118 million in state and local taxes), and the net payout on the $930 million lump sum option would be "only" $444 million.