Taxes and the Lottery Jackpot

The lottery jackpot is a big prize, but you won’t get to keep all of it. The biggest prizes in popular games such as Powerball or Mega Millions are subject to federal taxes and state income taxes in many states. Those taxes can cut into the advertised jackpot by millions of dollars.

You may be able to lower your tax bill by choosing an annuity payment, which spreads out the payout over decades instead of giving you the entire amount all at once. But most winners choose to take a lump sum payout, which can reduce the total by even more. That’s because the time value of money – what the money is worth in a lump sum compared to an annuity – can make a huge difference.

AARP’s Malori Malone, CFP, suggests anyone who wins the jackpot has lots of decisions to make, including how to handle their winnings and whether to go public or remain anonymous. She says it’s usually a good idea to work with a team of professionals, like an attorney and financial planner or wealth management adviser. That way, you can weigh the pros and cons of each option and decide what’s best for you.

While lottery jackpots seem to be getting larger and more frequent, it isn’t because the odds of winning are worsening. Instead, higher interest rates are causing the lump sum prize to grow faster than it would have been at lower rates.