If you have dreams of hitting the jackpot in the next Powerball or Mega Millions drawing, remember that a big slice of what the lottery giveth, the taxman taketh away.
With no one nabbing the top prize in the last drawings for either game and the odds of doing so stacked against players, the jackpots have continued climbing: $322 million for Powerball's drawing on Wednesday night and $267 million for Mega Millions' Friday-night drawing. (The winning numbers for Tuesday night's Mega Millions drawing were: 10, 12, 14, 24, 60; Mega Ball: 20.)
Your chance of winning Powerball is about 1 in 292 million. For Mega Millions, it's roughly 1 in 302.6 million. Your shot at winning both? At least 1 in 88 quadrillion (that's 88 followed by 15 zeros).
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A customer buys Powerball tickets at Kavanagh Liquors on in San Lorenzo, California.
At some point, of course, there will be winners — and the IRS won't waste time taking at least some of the loot.
Lottery officials are required to withhold 24 percent of big lottery wins for federal taxes. And that's only the start of what you would pay to Uncle Sam and, typically, state coffers.
"That withholding is nowhere near enough," said Ed Slott, a CPA and founder of Ed Slott & Co. in Rockville Centre, New York. "You'd have to set aside a lot for taxes."
Regardless of whether jackpot winners choose to take their winnings as an annuity over several decades or as a lump sum, the IRS is waiting in the wings.
First, the bigger jackpot: For the $322 million Powerball haul, if you were to go with the cash option — most winners do — the 24 percent federal withholding would reduce your loot by about $47 million to $149.1 million.
However, with the top federal tax rate of 37 percent applied to income above about $510,000 for single tax filers ($612,000 for married couples filing jointly) you could count on owing more — a lot more.
For illustration purposes: If the winner had no other reductions in income — for example, significant charitable contributions from the winnings that reduced taxable income — this would mean another 13 percent, or $25.5 million, going to the IRS ($72.5 million in all).
At that point, you'd be left with $123.6 million. And that's before state taxes (unless lottery wins are not taxed locally), which can range up to more than 8 percent, depending on where the ticket was purchased and where you live.
In other words, the winner could end up paying north of 45 percent in taxes.
More from Smart Tax Planning:
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Getting zero back from the IRS might be a good thing
For Mega Millions, the 24 percent federal withholding would reduce the $161.7 million cash option by $38.8 million to $122.9 million. Again assuming no reduction in taxable income, another $21 million or so would be due to the IRS, for a total of $59.8 million.
Meanwhile, Uncle Sam could be keeping an eye the still-unclaimed $1.5 billion Mega Millions jackpot along with other lottery watchers. The automatic 24 percent federal withholding on that jackpot's $877.8 million cash option would mean a whopping $210.7 million going to the IRS right off the bat.
The winner (or group of winners) has until April 19 to claim the prize. If no one comes forward by then, all of the prize money would be redistributed to the states and locales that participate in Mega Millions.
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