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You've probably imagined what it would be like to win the Powerball jackpot, but do your dreams include an IRS tax collector celebrating with you? Maybe they should.
Wednesday's jackpot is expected to be a record $425 million. The numbers are making people lotto-crazy, but if you win, don't expect to be $425 million richer.
Instead, you'll have a lot of paperwork to do and some financial (and legal) decisions to make. Winning the lottery is a dream come true, but winners still have to pay taxes. The only question is, how much?
Right off the bat, the IRS will take 25 percent from your lottery winnings for federal taxes. But that's not all, as Forbes notes.
Because you'll have earned so much money this year with your income plus your Powerball winnings, you'll probably fit into the top tax bracket and owe 35 percent in income tax. Come April, the IRS is going to ask for that money. Hopefully you'll have set it aside.
Then there are state taxes.
The majority of states have their own income tax, and many local governments take their own bite as well. That could skim another 10 percent off your winnings.
However, state and local income tax are deductible from federal income taxes, so they can somewhat lower your federal tax burden. And you might be lucky enough to live in one of the states without income tax or that exempts lottery winnings. Then you only have to pay the federal amount.
For any big lottery winner, a big question is whether to take the lump-sum option or yearly payments. That question also presents some tax implications.
If you take the lump sum, all your taxes are paid out at once which may seem like a rough deal. But there's a good chance you'll pay less in taxes overall than you would with annual installments.
Part of the reason for that is the total amount of money you get in the lump payout is somewhat smaller than the amount advertised. Given the current political rhetoric about "taxing the rich," there's also a chance high earners will have to pay more in coming years.
Choosing the lump-sum payment means you'll fall under this year's tax rate, which may be better than whatever the rate is in the future.
Go ahead, live a little and buy that Powerball ticket if you so choose. But if you win, make sure you remember your legal responsibility as a taxpayer and give Uncle Sam his share.
More questions about taxes? If you need to know what your responsibilities are, post a question on our FindLaw Answers Forum where our community of legal contributors can share their expert opinions.
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
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