What Will the $590 Million Powerball Winner Pay in Taxes?

The lone Powerball winner seems to have all the luck. The winning ticket was reported to be purchased in Zephyrhills, Florida. Assuming the lucky dog is also a Florida resident, he or she escapes state and local income taxes on the winnings. However, Uncle Sam is not so generous.

The winner won a little over $590 million. He or she can choose to be paid in installments over 30 years,  at close to $20 million a year, or a lump-sum option of a little over $370 million to be received all in 2013. This reason for the smaller amount of the lump is that it is the “net present value” of the future right to the income — because a dollar today is more than a dollar in 30 years, especially if that dollar could be invested over 30 years.

Lottery5.20Either option the winner picks, he or she will be hitting the highest marginal tax bracket when the payments are received. The top federal tax rate in 2013 is 39.6%.

Even though not everyone knows lottery winnings are taxable, Powerball certainly does. If you win above a certain amount, 25% will be automatically withheld from your winnings for federal income tax purposes. Powerball sends you a Form W-2G showing the amount of lottery winnings paid to you during the year and the amount of federal income tax withheld. This also gets sent to the IRS.

The automatic withholding definitely helps come tax time when you calculate your tax bill. But it doesn’t take a tax professional to know that the 25% is a drop in the bucket considering that the tax rate will be 39.6% on such huge sums of money.

This lucky winner had better be paying estimated tax payments in advance throughout the year; the amount of tax withheld from the lottery winnings will not be nearly enough to cover the winner’s federal tax bill. If the winner fails to do so, underpayment penalties will apply.

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