Jonathan Alcorn | Reuters
If you manage to beat the stacked odds with hitting the Powerball Jackpot, don’t forget you’ll have a silent partner in the winnings: the tax collector.
If you choose to discount three decades as a spread of windfall, the Saturday night drawing jackpot is now the largest lottery prize at $1.6 billion. The cash advance option — which most Jackpot winners choose — is $782.4 million for this drawing, also pretax.
A single ticket in Pennsylvania has a $292 million chance of hitting No. 1 in Japan, with the top prize increasing in three weekly drawings starting Aug. 3. .
More from Personal Finance:
How much a car loan can cost based on your credit score.
Free returns at retailers may soon be a thing of the past.
Affluent consumers embrace secondary marketing.
These days, the annuity option compared to the cash option has higher interest rates to support the game’s bigger prize money, according to the Multistate Lottery Association, which administers the Powerball. The cash option, however, is driven by ticket sales.
$187.8 million will be shaved off the top.
What taxes do you pay if you beat the odds and win the lottery?
If you were like most winners and chose the cash option, the 24% federal tax deduction would reduce $782.4 million by $187.8 million.
At tax time it could be even more because of the IRS. The top federal income tax rate is 37 percent, and this year it applies to individual taxpayers earning more than $539,900 and married couples earning more than $647,850. Next year, the top rate is imposed on incomes of $578,125 (individuals) and $693,750 (married couples).
That means another 13% — or $101.7 million — is due to the IRS unless you can reduce your taxable income by making charitable donations. That means a total of about $289.5 million going into federal coffers, leaving you with a cool $492.9 million.
State taxes may also apply depending on where the ticket was purchased and where you live. While some states have no income tax – or don’t tax lottery winners – others impose a higher tax rate of over 10%.
However, the winner will make more money than most people will ever see in their lifetime.
Meanwhile, the Mega Millions jackpot is $119 million, or $57.7 million in cash, according to the Mega Millions website for Friday night’s drawing. The chance that your ticket will hit the jackpot in that game is approximately 1 in 302 million.
Correction: The headline in the previous issue misstated the jackpot feature.