SUMMARY
- Powerball winners can either accept a lump sum of $310.6 million or $615 million in annual payments, though a significant portion will be withheld for taxes.
- Opting for annuity payments over 30 years offers more flexibility in tax management.
- Winners not only face a mandatory 24% federal withholding, but additional state taxes and further federal income tax obligations could be owed.
If luck favours you in the forthcoming Saturday's Powerball lottery draw, brace yourself for a considerable deduction as the taxman takes his portion.
The triumphant player of Powerball has two options - walk away with a cool lump sum of $310.6 million or take home yearly instalments amounting to $615 million. However, these figures are preliminary until the Multi-State Lottery Association finalizes its investment purchase proposals.
John Chichester Jr., a certified financial planner and the founder of Chichester Financial Group in Phoenix, points out an unusual aspect of lottery winnings. "One can choose to receive the windfall over a span of 30 years via annuity payments, which allows for much more tax management flexibility," he explains.
As opposed to facing a hefty, immediate tax levy, the annuity payment choice allows you to invest your fortune in a tax-savvy manner, suggests Chichester, who is also a qualified public accountant.
However, the chances of becoming a Powerball victor are quite slim, standing at around 1 in 292 million.
Before lottery champions can savour their wealth, a compulsory 24% federal withholding is deducted, a tax which applies to winnings exceeding $5,000.
If you opt for the $310.6 million cash lump sum, the 24% withholding tax trims your take-home amount by a whopping $74.5 million. Chichester warns that many taxpayers incorrectly believe that after the 24% deduction, they are tax-free, which is far from the truth.
"The 24% is just the initial slice; an additional 13% tax responsibility looms," Chichester explains.
This is because a lottery windfall propels you into the highest federal income tax bracket, where the 37% rate applies to taxable income of $578,126 (or more) for single filers, or $693,751 (or more) for married couples filing jointly.
Also, depending on your state of residence and where you bought your ticket, you might be liable for state taxes, which can reach beyond 10% in some states.
And remember, Powerball isn't your only opportunity to strike it rich. Friday night’s Mega Millions draw has a jackpot standing at an impressive $450 million, though the odds of winning are slightly steeper at about 1 in 302 million.
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