One winning ticket for Friday’s Mega Millions jackpot – a prize of an estimated $1.35 billion – was sold in Maine and tax officials are probably just as excited as the ticket holder, who has not yet been identified.
Depending on choice of payout, the winner may have to wait three decades to become a billionaire, even though the jackpot is the second-largest in the lottery’s history. It’s also the fourth time since October 2018 that winnings have exceeded $1 billion.
The sole winner, however, won’t take home any money without paying substantial taxes on it first. Winnings are reported to federal and state tax agencies, and tax rates are based on taxable income.
What to know if you hit the jackpot: Here are the first steps you should take after winning.
The winner can choose to take the full amount in annual payments over 29 years or a smaller lump sum immediately in cash.
How much tax on a $1.35 billion lottery win?
The single winner could take the total $1.35 billion in 30 payments over 29 years or go for the one-time cash option – in this case, $707.9 million – which is what most winners choose.
Regardless of which option the player takes, the IRS takes a minimum 24% federal withholding tax upfront on lottery winnings. That’s a big chunk out of either payment choice. If the total $1.35 billion payout is chosen:
- Federal taxes: $324 million
- Take-home: $1.026 billion (by 2051)
If the cash option of $707.9 million is taken:
- Federal taxes: $169.9 million
- Take-home: $538 million
The total federal tax rate, however, is higher
Tax experts say exact tax amounts can’t be precisely calculated since tax brackets shift over time and the final tax amount depends on the jackpot winner’s income level.
Without other deductions or contributions, a winner could pay a tax rate of up to 37% this year under the top federal income tax rate, which is based on income of more than:
- $578,125 for a single taxpayer
- $693,750 for a married couple filing jointly
With a federal tax rate of 37%, a Mega Millions winner would pay a total of $499.5 million in federal taxes and pocket $850.5 million by 2051 if the total $1.1 billion payout was chosen.
If the $707.9 million cash option was taken, the winner would pay $261.9 million in federal taxes and take home $446 million.
The IRS takes 24% of winnings upfront and collects the rest when the next tax return is filed.
Some states tax winnings, too
That’s just federal taxes. While not all states tax winnings, some do. New York takes the most with a rate of 10.9%. Maine has a rate of 7.15%, according to Lottery USA. Some cities also impose taxes.
What is better, total payout or lump sum in cash?
The total amount is paid in annual installments over 29 years, with each payment 5% larger than the preceding one. It’s guaranteed income, but the drawbacks are:
- Tax rates could rise over the next 30 years.
- If you die before all payments are made, your estate would be taxed at amounts more than $22 million.
- The entity making payments could go bankrupt.
Those who advocate taking the lump sum say the windfall grow with smart investments. Drawbacks include spending the money or giving too much of it away.
For those reasons, a 2018 USA TODAY analysis recommended taking the lump sum.
Mega Millions payouts, total amounts, and cash
45 states participate in Mega Millions
Mega Millions can be played in 45 states, the District of Columbia and the Virgin Islands. The numbers are drawn Tuesdays and Fridays at 11 p.m. ET. Tickets cost $2 a play.
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SOURCE USA TODAY Network reporting and research; Associated Press; lotteryusa.com; Internal Revenue Service; Kiplinger; megamillions.com