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How the GOP tax plan could affect a Powerball or Mega Millions win

  • Under the GOP tax plan, lottery jackpot winners could see a bigger tax bite in the year they win due to elimination of the state and local income tax deduction.
  • But there's a long-term benefit, with proposals to curtail the estate tax.

Jackpots for the Powerball and Mega Millions are inching upward, and experts say a big lottery win would be even sweeter this year ahead of proposed tax reforms.

As of Monday afternoon, the Mega Millions jackpot was $191 million and the Powerball, $229 million. Both games had their most recent jackpot wins in late October. (Although large, neither of the current jackpots is a record-setting amount: For either to land in the top 10 of U.S. lottery jackpots, the prize would have to surpass the $448.4 million Powerball shared by two winners in August 2013.)

The next Mega Millions drawing is at 11 p.m. ET on Tuesday, and the next Powerball drawing is at 10:59 p.m. ET on Wednesday.

"The rule of thumb is that you walk away with about a third of [the jackpot]." -Susan Bradley, Sudden Money Institute

Under current tax rules, a jackpot winner could expect to fall in the top bracket of 39.6 percent. The winner would also pay top rates for state and local income taxes, which, depending on where they live, could knock out up to another 15 percent or so.

But state and local taxes are — at least through the end of 2017 — deductible on your federal return if you itemize, reducing your taxable income. (High-income taxpayers can't take full advantage: Their itemized deductions are reduced under the so-called Pease limitation.)

Of course, there are myriad other elements of a winner's tax situation and choices that can sway the final tax bill.

"The rule of thumb is that you walk away with about a third of [the jackpot]," said Susan Bradley, a certified financial planner and founder of the Sudden Money Institute in Palm Beach Gardens, Florida.

"That's still a life changer," she said, especially on a jackpot exceeding $100 million.

Under proposed tax reforms, however, many winners in 2018 and onward can expect a slightly larger tax bite. Depending on how Congress reconciles differences in its passed bills, a jackpot winner would still end up in the top bracket, with a rate of either 39.6 percent (the House tax plan) or 38.5 percent (Senate tax plan).

The kicker: State and local income taxes would no longer be eligible as an itemized deduction. That likely whittles a few million dollars more off your take-home amount. (The luckiest winners will still be in those states that participate in that multistate lottery but either do not have an income tax or specifically do not tax lottery prizes.)

"You lose that deduction, which is going to hurt in the year you win" — especially if you live in a high-levy state, said Jason Kurland, a partner at Certilman Balin Adler & Hyman in East Meadow, New York, who is known as the Lottery Lawyer.

But there's a "tremendous" long-term tax benefit for lottery winners, with tax reform provisions that would eliminate the estate tax or make it easier to avoid, Kurland said.

Both the House and the Senate versions would double the amount a wealthy individual can transfer in death tax-free, to about $11 million. The House goes a step further, setting the estate tax to disappear at the end of 2024.

"The benefit for lottery winners is huge, because the estate tax is really targeted toward people like this," he said.

The key takeaway for jackpot hopefuls: Next year, it will become even more important to make sure you're putting together an expert team (accountant, financial advisor and attorney) ahead of claiming the prize, who can help you strategize how to claim the win and maximize your take-home amount.

Only part of your federal and state tax burdens are withheld upfront, and it's important to figure out the whole tab quickly, Bradley said. (See infographic below.) Miscalculating the final tax bill can be an expensive misstep for winners trying to figure out how to save or spend their haul.

"At the end of the day, it's all about net numbers," she said.

More from Personal Finance:

This interactive chart shows how the GOP tax plan will hit your wallet

Here's what the Senate's tax bill means for your wallet

Before you ring in 2018, make these big-money tax moves