How Much Tax Do I Pay If I Win the Lottery?

Not to rain on the Powerball payout parade, but those looming taxes on your lottery winnings might just bring you back down to earth when you're on cloud nine because lottery winnings count as prize money, and prize money counts as taxable income.

You might have won the lottery against all odds, but you just can't beat the taxman. Of course, exactly how much you fork over to the IRS depends on the state in which you win and how you choose to take those sweet, sweet winnings.

Winning your state's Powerball is a pretty sure bet for skyrocketing you into the top income bracket. And since your lottery winnings are taxed like income, that means they'll be taxed at about 37 percent. For example, a lottery winning of $5 million dollars after taxes might look more like $3.16 million. Be prepared: The federal government will withhold 25 percent of your payout before it hits your bank account, with the rest due when you file your taxes.

Then comes the state taxation, which ranges from a low 3 percent in New Jersey to a high 8.82 percent in New York. If you're lucky enough to win the lottery as a resident of California or Delaware, you don't have to worry about the state taxing your winnings. Of course, states that don't levy individual income taxes, such as Texas, Florida and Washington, will leave you with more lottery money.

Lottery winners have the option to receive a lump sum or take their winnings via an installment plan, and these options differ in how they're taxed. If you take the Powerball cash option – the lump sum – your money is taxed up front.

If you opt to receive annual Powerball payments instead, you'll get a (still taxable) portion of your winnings from the get-go and installments over 30 years. You'll still owe federal taxes, but you'll pay them for each installment instead of all at once. At the end of the day, the up-front option results in less taxation.

It's no secret that the Tax Cuts and Jobs Act – the tax bill passed by President Trump's GOP in late 2017 – favors the wealthy in just about every respect, and that extends to newly wealthy lottery winners.

Because the bill cuts income taxes for high earners, federal taxes on income such as lottery winnings will be reduced by about 2.6 percent. For a $500 million Powerball, that comes out to a savings of about $13 million.

However, these tax savings may be negated by the very same bill, which no longer allows taxpayers to deduct what they pay to state and local governments from their federal taxes.

Taxpayers filing for the years 2017 and before are able to deduct payments to state governments from their federal taxes. That means that if you won a $500 million Powerball in 2017 and owed the state of New York $44.1 million per their 8.82 percent state tax rate, you'd be able to write that payment off and potentially save yourself millions in taxes.

For the 2017 tax year, the top federal tax rate was 39.6 percent on income of more than $418,400 for individuals, so federal taxes will be a bit more for 2017 winners than 2018 winners.