The dream of a monumental lottery win turned into a stark financial lesson for one British expatriate, as a record-breaking $1.3 billion Powerball prize was decimated by the US taxman.
The staggering win, equivalent to over £842 million, was subject to an immediate and eye-watering $478 million (£370 million) in federal taxes, a reality rarely discussed amidst the champagne dreams of jackpot winners.
The Bite of the US Tax System
Unlike the UK's famously tax-free lottery prizes, the United States imposes a hefty federal tax on all gambling winnings. For a jackpot of this magnitude, the winner faces a mandatory 24% upfront federal withholding tax. However, this is merely a deposit against an even larger final tax bill.
Because the prize pushes the winner into the highest possible tax bracket, the final income tax rate applied is 37%. This colossal deduction transforms a life-changing sum into a still-massive, but significantly reduced, fortune.
State Taxes: A Second Blow
The financial burden doesn't end with the federal government. Most US states levy their own additional tax on lottery winnings. The rate varies dramatically depending on the state where the ticket was purchased.
For the 2022 Powerball winner, Edwin Castro, who won in California, he faced a relatively favourable outcome as the state does not tax lottery prizes. A win in a state like New York, however, could have siphoned off another 10% in state taxes.
A Warning for UK Players
This story serves as a crucial warning for UK citizens and expats tempted by massive US jackpots. The allure of a billion-dollar headline prize is a mirage.
The fundamental difference in tax law means a UK winner of a £100 million Lotto jackpot receives every single penny. In contrast, a US winner of a similar amount would be left with a fraction after taxes.
For any Brit playing the Powerball or Mega Millions, it's essential to understand that the advertised jackpot is a gross figure, not the net amount that will land in your bank account.
