The latest Powerball jackpot now set at $1.787 billion, has lottery players all over the Country clamoring for a chance to become an instant multimillionaire. While two winning tickets sold in Missouri and another state will bring joy to their holders, they are likely to face substantial tax implications. Missouri’s tax laws leave winners dealing with a challenging set of state and federal taxes. This complex process can seriously chip away at their net prize earnings.
In Missouri, any lottery prize over $600 requires 4% state income tax withholding. This is in addition to the fact that a winner’s first payout will already be subject to this reduction. For bigger prizes such as the Powerball jackpot, the state’s maximum income tax rate will raise. It’s scheduled to increase to 4.7% beginning in 2025.
That fortunate Missouri ticket holder will have the choice of the lump sum option, which comes to approximately $410.3 million, before taxes. If they take this route, state tax will cut their profits by about $16.4 million. This calculation does not include federal obligations. Given the anticipated size of a few of the winners, those with taxable incomes above $626,350 will be subject to the 37% tax notch.
According to IRS rules, lottery prizes over $5,000 are subject to 24% withholding. Taking the lump sum prize of $410.3 million guarantees a massive federal tax hit. These funds would be cut immediately by roughly $98.5 million from that total. If he wins, he might be stuck with a huge tax bill. At both the state and federal level, this could be in the millions.
Winners opting for the annuity will receive an initial one-time payment. After that, they will get 29 annual installment payments, and each payment accelerates at a rate of 5% per year. This approach would yield winners with more predictable annual revenue in the long term, but it exposes winners to future tax obligations.
As attorney Andrew Stoltmann explained, “Virtually everybody who wins the lottery takes the lump sum distribution. This growing trend is a testament to the desire for quick access to cash, regardless of the significant tax burdens it brings with it.
Missouri is one of several states that tax lottery winnings at the state level. Texas residents have the luxury of zero state taxes on their lottery winnings. This jarring contrast emphasizes the disparate tax environments found throughout the country, which play an outsized role in determining winners’ decisions and success.
To be fair, Powerball is tempting players with its gigantic jackpots. The calculated jackpot for Tuesday night’s Mega Millions drawing is now up to $358 million, a fortunate wakeup call for winners all over the country to be aware of their possible tax consequences.
Winners in Missouri will want to brace for a complicated financial environment. Facing millions more in state income taxes owed on top of their federal obligations, they have to weigh their choices under a magnifying glass. The potential to win a big prize is obviously a massive financial incentive. Federal and state taxes can cut that in half or more.