Public Enemy Number One: Taxes
Now you know how lottery prizes can shrink from $188 million to $127 million, solely based on the payment structure you pick. But there is another challenge: taxes. State and federal taxes can take up a bulk of the prize money. Because lottery winnings are evaluated in the same category as income when it comes to federal taxes, almost 25% of the initial lump sum is already out of the picture. That’s a pretty huge amount!
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For winnings that are big enough to fall into the highest tax bracket, the government can take up to 39.6%. If Holmes’ prize was to be taxed at that level, she’d have had to give up about $50 million in taxes alone. And this is still just the beginning. After federal taxes are put aside, there are also state taxes to pay. In North Carolina, this is about 5.8%.