The Powerball lottery jackpot is advertised as $1,400,000,000 but if (when!) you win, how much will you really see deposited into your bank account? First, let’s assume that you hold the only winning ticket (you have a about a 1 in 300 million chance). The advertised amount is what you would receive if you agree to take payments spread out over 30 years. If you opt to take the lump sum (which most financial advisers would recommend), you would receive a fairly decent deposit of $868 million – that’s a loss of 38% of the advertised jackpot.
After that, Uncle Sam will be ready to tax the lump sum amount as your regular income at the highest federal rate of 39.6%, leaving you with $524 million. If you live in Illinois, you will also need to pony up another 3.75% for Illinois income tax – for a net total of around $492 million. Bam, you just lost almost a billion dollars from the advertised jackpot.
Another factor to consider is gifting. If you decide to generously spread out your winnings to friends, family, neighbors, or your local attorney, any amount gifted may be subject to a federal gift tax of 40%. If you have an agreement to share prize money before the drawing, though (like an office pool), that would not result in gift tax.
So, when you’re deciding how much of your nest egg to invest in lottery tickets, don’t be fooled by the advertised jackpot – you could lose a billion dollars.