When it comes to lottery winnings, you might not walk away with as much money as you thought. Last week, one lucky powerball contestant won the grand prize of $758.7 million. Of course, this is not the actual sum of money she will receive when considering the taxes. While the federal tax on lottery winnings is consistent, state taxes can vary. Below are a few things to consider when trying to wrap your head around the large sum of money.
Annuity vs. Cash Option
When it comes to collecting your winnings, you essentially have two options; an annuity plan or the cash option. An annuity plan for your winnings will come over a period of 29 years with 30 annual payments. This will accumulate to the headline prize sum, in this case $758.7 million. If you choose the cash option, or lump-sum, your winnings will be discounted the cash-value amount. This can reduce your winnings by 30-40%. Check out IRS W-G2 and 5754 for more on this topic.
Federal and State Taxes
On large winnings, you can expect to pay the highest federal tax, which is 39.6%. For smaller lottery winnings, the tax can be as low as 25%. Regardless, this can add an extra dent in your winnings. And we’re not done there. You still have to pay your state taxes for the prize. Each state has its own tax rate for lottery winnings. While some states don’t participate in the lottery, there are states that can withhold as much as 8% or more, for example New York. On the contrary, a select few states void taxes on lottery winnings altogether.
Below is a breakdown for state withholding taxes on lottery winnings.