Jackpot winners don’t get all of the money, thanks to federal taxes and, often, state taxes. In fact, Uncle Sam takes a piece before the prize even reaches you.
Whether you take your haul as a lump sum or as an annuity spread out over three decades, your win is reduced by a 24 percent federal withholding.
Mega Millions’ upfront cash payment — the option most winners go with — is $210.2 million. The federal withholding would reduce that by nearly $50.5 million, reducing your take to about $159.7 million. However, because income above $500,000 is subject to a top federal tax rate of 37 percent, you could expect to owe more at tax time.
For Powerball, the cash option is $177.6 million. The 24 percent federal withholding would cut that amount by about $42.6 million to about $135 million.
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On top of that, you’ll face state withholding unless you live where lottery wins are untaxed. For states that do take a piece, the rate ranges from a high of 8.82 percent in New York to a low of 2.9 percent in North Dakota, according to lottery site USAMega.com.
In other words, you could end up paying more than 45 percent altogether in taxes, depending on where you purchased the ticket and where you live.
“I see the withholding as a good thing,” said Cari Weston, a CPA and director of tax practice and ethics for the American Institute of CPAs. “When people come into a lot of money all at once, the last thing they’re thinking about is their taxes.”
There are strategies you can employ that reduce your taxable income, and therefore the amount you pay in taxes. For example, you can make a cash donation of up to 60 percent of your adjusted gross income and carry forward, up to five years, any excess amount.
Some lottery winners set up their own charitable foundation and donate a portion of their winnings to it.