Looking at the taxation stats for Powerball winners, these are some of the best states and the worst states with big wins.
We’ve shared some fun and inspirational stories about Powerball winners from coast to coast. And some states are home to more Powerball winners than others. Additionally, there are state-level taxes to consider. Those can impact just how much of your prize money you get to take home. Today, we’ll examine some of the history of where winners hail from, as well as the current tax rates by state, to see which are the best states and the worst states for collecting taxes.
These States Are Among the Worst
If you’re playing Powerball in New Jersey, be prepared to pay out the most in taxes when you win. With a going rate of 10.75% in 2021, it’s the worst state for impending Powerball taxes. On the opposing side of the country, the runner-up in the worst-taxation category for lottery wins is Oregon, with a 9.9% tax rate. Additional states among those taking the biggest bites of Powerball prize winnings include Minnesota with a tax rate of 9.85%, D.C. with 8.95%, and New York at 8.92%. And if you play Powerball in Maine, Wisconsin, Arizona, Iowa, or Vermont, you’ll be paying between 7.15% and 8.75% in lottery taxes, too.
These States Have Lower Tax Rates on Powerball Winnings
California has a reputation for a high cost of living and some of the highest income tax rates in the whole country. But when it comes to winning Powerball, California doesn’t tax it. Other states that don’t have income tax at all include Texas, Washington, Tennessee, South Dakota, Florida, and Wyoming.
These states do impose tax rates on prizes but fall at the lower end of the taxation rates, based on 2021 data:
- Pennsylvania: 3.07%
- Colorado: 4.55%
- Illinois: 4.95%
- Kentucky: 5.00%
- Missouri: 5.40%5
- North Dakota: 2.90%
- Indiana: 3.23%
- Ohio: 4.79%
- Oklahoma: 5.00%
- Massachusetts: 5.00%
Don’t Forget the IRS
Now that you know which states take the most out of your potential Powerball winnings, you might decide to be smarter about where you purchase your tickets. But don’t get too excited just yet. The IRS will take a cut of those jackpots, too. In fact, the federal tax withholding rate on lottery winnings is 25%. With that said, traditional withholdings for FICA, Social Security, and Medicare, which are normally imposed on “earned income,” do not apply to Powerball wins. Powerball prizes aren’t technically “earned,” so they’re exempt from FICA taxation.
Here's another taxation nuance to know. If you win $5,000 or more, after deducting the cost of your ticket, the IRS will automatically take the 25%. But those taxes will be held much like your employer withholds taxes from your paycheck. If, at the end of the year, you don’t end up owing the full amount, you could still be eligible for a decent refund when you file your return.
Lump Sum vs. Annuity Payments
So, how do taxes work when you take the lump sum payout versus the long-term payment schedule of your Powerball jackpot? For those Powerball winners who want to take the cash-out payment upfront in one lump sum, be prepared to pay applicable taxes once on that full amount. For those who opt for the series of payments over time, applicable taxes will be levied annually when you file your tax returns.
When you find yourself becoming a Powerball prize winner, don’t forget, you’ll have to pay those taxes. And depending on which state you’re playing in, you could pay a pretty big chunk. It’s definitely worth talking to a finance professional or advisor before making any official plans with your Powerball winnings. Understanding the taxes is only one aspect of becoming a winner. But now that you know, maybe you can be a little more strategic about where you buy your tickets.