How much tax would you pay if you won the $1.35 billion Mega Millions jackpot?
The Mega Millions prize soared to $1.35 billion, but once the federal tax authorities wet their beak, the winner will be left with around a third of the jackpot.
Yet another billion-dollar-plus jackpot was won on Friday. The fact that the Mega Millions drawing for $1.35 billlion was won on Friday the 13th meant that someone in Maine got very lucky. Six previous jackpots had been won on the infamous date.
So, how much will the winner have to pay to Uncle Sam? Depending on where the winner lives in the United States, he/she could face a tax bill of more than $261 million.
That’s because gambling winnings of over $5,000 are taxable in the US - and it’s not only federal taxes you have to think about. Your state may also want a cut.
Lump sum of nearly $708 million
If the winner takes the money as an up-front, lump-sum payment it won’t be for the full $1.35 billion. The ‘cash option’ payout is “equal to the cash in the Mega Millions jackpot prize pool”, the draw organisers say. In this instance, it works out at $707.9 million.
Were the winner to plump for the ‘annuity option’, on the other hand, they’d get the jackpot in its entirety, but not all at once: an immediate payment of about $20 million would be followed by annual cheques that increase by 5% each year, to a maximum of about $83.7 million. This option protects people against (somehow) blowing their pot of gold all at once, but comes with the risk of tax hikes leading to higher rates being levied on your prize money further down the line.
The majority of winners tend to go for the lump-sum payment - “most of them want all their money now,” lottery spokesperson Elias Dominguez told ABC - so the tax they’d pay on the ‘cash option’ is what we’re going to focus on in this article.
Say goodbye to almost a quarter right off the bat
Before the money reaches the jackpot winner, it’s subject to a 24% federal tax on gambling winnings - so, this week’s one-time Mega Millions payout is $707.9 million, that’s about $169.9 million that you’d have to hand over to the IRS straight away. The federal taxman isn’t done there, though…
Say hello to the top income tax bracket
When tax season comes around, you’ll find yourself on the hook for another piece of your lottery money. That’s because a nine-figure Mega Millions win will have pushed you, rather comfortably, into the IRS’ highest income-tax bracket.
Currently, US tax residents must pay a top rate of 37% on annual earnings over $539,900, so the winner would be liable for the 13% difference between that and the 24% applied to gambling winnings. The winner would only have to fork out the top rate on every dollar above $539,900, though; lower levies will be applied to winnings up to that amount. In short: they can expect the IRS to lop another $92 million or so off that initial $707.9 million.
All in all, then, around $261.9 million in federal taxes will leave the winner with about $446 million.
The best/worst states for lottery winners
And then it’s time to work out what you owe your state’s tax office.
For winners in California, Delaware, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming, they would have no more tax obligations to worry about. California and Delaware impose state income tax but not on lottery winnings, while the other seven states don’t have an income tax.
We can also forget about Alabama, Alaska, Hawaii, Mississippi, Nevada and Utah, as Mega Millions can’t be played in those states.
Meanwhile, nine states - Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah - have a flat income tax rate that’s mostly around the 5% mark. That means winners would have to cough up another $35 million and a bit. The exceptions to that are Pennsylvania and Indiana, which would take 3.07% and 3.23%, respectively, from the winnings.
Elsewhere in the US, is the highest band of a graduated state income tax. Winners would be looking at anything from 2.9% in North Dakota, to 10.75% in D.C., New Jersey and Wyoming, and 10.9% in New York. NY’s top rate is only applied to every dollar earned over $25m, but they’d still be facing a state tax bill comfortably north of $74 million.
Check out the full list of state income tax rates in the US
Of course, the likelihood that someone would actually have to consider any of the above is vanishingly remote. Per CNBC, the chance of a single Mega Millions ticket matching all six numbers is one in 302 million.