More to the Powerball Than the Jackpot Amount

It can be tempting to take a shot at the Powerball when the jackpot equals or exceeds the true odds of winning.  The chances of picking all five numbers and the Powerball number are about 175 million to 1, while the current jackpot is an estimated $290 million.  Considering the non-jackpot wins, it may seem like a positive play to buy tickets, but there are other items to consider.

Powerball Odds

A Powerball ticket now costs $2.  A ticket will cost $3 if the Power Play option is chosen.  The Power Play does not increase the jackpot payout, it only increases lower tiered payouts.  A player has a 35-1 chance of hitting the Powerball number, which is the lowest winning tier.  The payout for this hit is 4-1, but a player that chooses the Power Play option will win 12-1 by hitting only the Powerball.

Taxes

The top federal tax rate is 39.6% in 2013.  If a single player wins the $290 million jackpot then the tax bill will be $115 million.  According to the Tax Foundation, a New York City Powerball winner would pay an additional $36.6 million in state and local taxes based on the 12.62% combined rate.  A New Jersey Powerball winner would owe $31.3 million in taxes based on the top 10.8% state income tax rate.  A player in a state with a 5% income tax would owe about $14.5 million.  There are nine states that do not have an income tax on lottery winnings.

Cash Prize or Annuity

While the Powerball jackpot is being advertised as $290 million, the actual cash prize is about $169 million.  The $290 million number applies to a player that chooses to accept 30 graduated payments over 29 years.  The payment goes up each year.  Many players are not comfortable with waiting this long to receive their winnings as increases in tax rates or inflation could hurt the value of the annuity.  A winner’s age also plays a part in this decision.

Multiple Winning Tickets

Just as the higher jackpot may tempt you to play the Powerball, other players that typically pass on the lottery may also decide to buy tickets.  This increases the chances of more than one player holding a winning ticket.  Two winners would gross $145 million before taxes, while a three-way split would create a $96 million first prize.  The same tax rates described above would still apply on these wins, though the dollar amounts would be lower to reflect the shared jackpot.

The Dream is Sometimes Worth the Gamble

Part of the fun of playing the lottery is the dream of winning it big.  Even if half of the winnings are paid in taxes, it is still life changing money.  A few dollars can create a “what if” fantasy for a day or two.  Somebody has to win it!

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