Taxes and the Lottery Jackpot

A lottery jackpot is the top prize a player can win in a game of chance. In the case of Powerball and Mega Millions, jackpots can reach into the billions, attracting eye-popping headlines. But the amount a winner actually receives can be far less than those big numbers indicate, due to taxes.

Lottery winners can choose between receiving their winnings as an annuity (payments over 30 years) or a lump sum. In the United States, the IRS withholds 24% off the top of the lump sum. Winners may also be subject to state income tax. Depending on how the jackpot is invested, an annuity can result in smaller payments over time than the advertised jackpot, but the overall winnings can be substantial.

People buy tickets for lotteries because they want to dream big. But while people can develop an intuitive sense of risk and reward within their own experiences, those skills don’t translate well to huge jackpots. “Human beings have a hard time understanding risk when it’s very, very large,” says Victor Matheson, an economics professor at the College of the Holy Cross. That’s why he believes Powerball and Mega Millions have hit a sweet spot with their odds: They are around 1-in-292 million, which is the same as the combined population in all the states that sell tickets. If prizes got much bigger, Matheson says, people would stop buying tickets because they could never understand the true scope of the prize.