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Paul Anderson CPA > San Diego Tax Updates  > $2.04 Billion Powerball: Yes, You Do Have to Pay Taxes on Your Lottery Winnings

$2.04 Billion Powerball: Yes, You Do Have to Pay Taxes on Your Lottery Winnings

The largest ever Powerball Jackpot was just won this past Monday!  The lucky winner was a Southern California resident whose $2 ticket raked in $2.04 billion dollars!  But how much will he actually take home after paying the required taxes on his earnings?

How Much The $2.04 Billion Powerball Winner Can Take Home After Taxes

The winner has two options: receiving the total amount through 30 annual payments of around $68 million, or taking a smaller amount of $997.6 million right away.  However, the IRS automatically withholds 25% so once that is deducted, the lucky winner will get either a lump sum of $758.18 million or 30 payments of $43.27 million.  Most people choose the lump sum option, but a good certified public accountant (CPA) can help you determine the best option for your goals.

Playing the lottery is inherently risky.  The odds of winning are around 1 in 292 million.  In fact, there have been less than 400 Powerball jackpot winners in 30 years!  However, if you’re one to gamble, the largest jackpot in the entire history of Powerball is a pretty enticing chance to take.  Especially when tickets are only $2 apiece.

Even if you only get to take home $758 million out of the total $2.04 billion, you’ll still be ahead of 0.001% of Americans.  In fact, as of 2019, there are only around 2,250 people with a net worth of over $500 million in the United States.  Prior to this giant windfall, the largest Powerball win was $1.586 billion in 2016, which was split between three different people.

Why Do I Have to Pay Taxes on Lottery Winnings?

Lottery winnings are considered ‘earned income’ and must be treated as such. The federal government taxes all prizes as regular income, even if you didn’t try to win the prize.  So you’ll certainly have to report your winnings on Box 1 of IRS Form W-2G for your federal income taxes.  But most states also tax lottery winnings and require a separate filing.  Fortunately for the latest Powerball jackpot winner, California is not one of those states.

If you win the lottery, even a relatively ‘small’ amount compared to that whopping $2.04 billion, your first step should be to hire a certified public accountant (CPA) to help you manage your income.  The IRS will take 25% in federal taxes out of your earnings before you even receive the money, but you’ll be expected to pay the rest of what you owe when you file your income taxes that year.  A CPA can help you manage that large sum and figure out how to reduce your tax burdens to get the most out of your winnings.

A CPA will be able to advise you on your state tax obligations and help you with the resulting income taxes you’ll have in your new tax bracket.  Plus, they can help you figure out the estate tax benefits you can receive from passing your wealth onto future generations.  With your newfound wealth comes new responsibilities.  You don’t want problems with the IRS, so save yourself headaches down the line by contacting an experienced CPA right away.

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