How much tax will you have to pay if you win the $1.1 billion Mega Millions jackpot?
Rubbing your hands on the exceptional jackpot in this week’s Mega Millions lottery draw? Well, Uncle Sam too. Depending on where you live in the United States, you could face a large tax bill if your numbers were to increase. There were no winners in Tuesday’s Mega Millions draw, meaning the rolling jackpot now stands at $1.1 billion, the third-largest in lottery history. according to the official Mega Millions website.
However, gambling winnings over $5,000 are taxable in the United States – and it’s not just federal taxes you need to think about. Your state may also want a cut. So even if you hit the jackpot, a good chunk of that change will go to the ever voracious pockets of the taxman.
What a billion dollars really means
A Mega Millions lump sum of over $600 million to be won
The next draw is set to take place at 11pm ET / 8pm PT on Friday, July 29, when the Mega Millions draw will feature an estimated jackpot of over $1 billion. If you make a fortune by getting all six numbers, you will have two alternatives: the “cash option” or the “annuity option”.
If you take the former, you’ll receive the money in the form of an initial lump sum payment, but it won’t be for the whole thing. The “cash option” payout is “equal to the money in the Mega Millions jackpot prize pool”, according to the draw organizers. In this case, this corresponds to a lump sum payment of $602.5 million.
If you opted for the “annuity option”, on the other hand, you would get the full jackpot, but not all at once: an immediate payment of around $15 million would be followed by annual checks over 30 years that would increase 5% each year, up to a maximum of approximately $39 million. This option protects people from (one way or another) having their pot of gold blown all at once, but carries the risk of tax hikes resulting in higher rates being taken from your prize money later.
The majority of winners tend to opt for the lump sum payment – “most of them want all their money now,” lottery spokesman Elias Dominguez told ABC recently. Confused again? You can bet your bottom dollar, Uncle Sam, fixed it all.
A quarter of the jackpot tax to the IRS
Before the money reaches the jackpot winner, it is subject to a 24% federal tax on gambling winnings – so if this week’s Mega Millions single payout is $602.5 million, that represents approximately $144 million that you will have to remit directly to the IRS. The federal IRS isn’t done there, though…
The top tax bracket awaits you
As tax season approaches, you’ll find yourself on the hook for another chunk of your lottery money. That’s because a 10-figure Mega Millions win will have pushed you, quite comfortably, into the top IRS tax bracket.
Currently, US tax residents must pay a maximum rate of 37% on annual income over $539,900. You will therefore be responsible for the 13% difference between this amount and the 24% applied to gambling winnings. However, you will only have to pay the higher rate for each dollar above $539,900; lower drawdowns will be applied to your winnings up to this amount. In short: expect the IRS to lose somewhere in the region of about $80 million more than that initial $602.5 million.
All in all, if you hit the jackpot and opt for the lump sum option, you’ll have to pay around $224 million in federal taxes, leaving you with around $378 million.
Best/worst states for lottery winners
But you won’t be done with tax forms even then. Your state tax office will also want its slice of the pie, but if you live in California, Delaware, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, you don’t. you have more tax obligations to worry about. . California and Delaware tax income but not lottery winnings, while the other seven states have no income tax.
We can also forget about Alabama, Alaska, Hawaii, Mississippi, Nevada and Utah because you cannot play Mega Millions in those states.
Meanwhile, nine states – Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah – have a flat tax rate that is mostly around 5%. That means you’ll have to cough up around another $30 million. The exceptions to this are Pennsylvania and Indiana, which would take 3.07% and 3.23% of your winnings respectively.
Elsewhere in the United States, you will see between 2.9% in North Dakota, 10.75% in DC, New Jersey and Wyoming and 10.9% in New York.
See the full list of US state income tax rates
Of course, the likelihood of you actually needing to consider any of the above is extremely low. According to CNBC, the chance of a single Mega Millions ticket matching all six numbers is one in 302 million (1/302,000,000).