$1 billion Powerball winning ticket sold – but taxes cut winnings more than you'd expect

A winning ticket for the $1.08 billion Powerball, the third-largest in the game’s history, was sold in California Wednesday–but the winner will probably take home only about a third of that.

That’s because the Powerball winner, even though they’ve beaten the 1-in-292.2 million odds, must pay federal taxes and possibly state and city taxes, depending on where they live.

The winning jackpot numbers were 7-13-10-24-11, and the red Powerball was 24. The Power Play was 2X. The next drawing, on Saturday, is for $20 million and you can bet Powerball fans will be calculating what numbers to play.

The Wednesday’s winner will find that Powerball and Mega Millions lottery winnings are treated as taxable income. Powerball champs, who are advised to seek financial counsel before making decisions, have two options to collect the prize:

$516.8 million in a lump sum.
About $1 billion in an annuity of 30 graduated payments over 29 years.

Most winners take the lump sum payout. No one has chosen annuity payments since 2014, according to Axios.

What happens with the lump sum payout?

If our winner takes the $516.8 million lump sum payout, they’ll automatically pay the IRS $124.0 million, or 24% off the top in federal tax withholding, according to Forbes.

That leaves our winner with $392.8 million. But the total lump sum is subject to a federal marginal tax rate of up to 37%. That means another $67.2 million in addition to the $124.0 million withheld – a total of $191.2 million in federal taxes.

All this would be part of our winner’s 2023 federal income tax return and would ultimately leave them with $325.6 million, assuming no other deductions.

Our winner could also be subject to state taxes, depending on the state they live in. Some states tax lottery winnings, from 2.9% in North Dakota to 8.82% in New York. Some cities tax winnings as well.

What happens with the 29-year annuity?

Or, our winner can take home nearly the total amount in 30 graduated payments over 29 years. The payments are calculated to increase by 5% every year.

The payments are financed through Treasury bond investments, according to Axios. Bond values increase along with the interest rate on Treasury bonds. Higher interest rates thus increase Powerball amounts – and public interest in playing it.