taxes

Mega Millions Lottery Winner Will Get a Mega Tax Bill

The winning ticket for the $1.05 billion Mega Millions jackpot was bought in Michigan. After federal and state taxes are taken out, that amount will be much less.

Congratulations to the lucky winner who had the only ticket that matched all six numbers in Friday's Mega Millions lottery drawing. But there are two other entities who also won big – the federal government and the state of Michigan. That's because, between the two, they're going to get a big chunk of the $1.05 billion jackpot once the tax man claims his share.

$1.05 billion is the estimated value of annuity payments over 30 years. If the winner opts for an immediate lump-sum cash payment, which is what usually happens, the actual payout is only $776.6 million — before taxes.

Let's take a look at Uncle Sam's cut first. The top federal tax rate is 37% on 2021 income of more than $523,600 for individuals ($628,300 for married couples filing a joint return). That means last night's winner will pay about $287.3 million in federal income taxes, assuming he or she takes the lump sum. That knocks net winnings down to around $489.3 million. (The IRS will automatically take 24% of the winnings, and the winner will owe the rest at tax time).

Now it's Michigan's turn. (Since the winning ticket was purchased in Novi, Michigan, we're assuming the winner is a Michigan resident.) Michigan has a flat income tax rate of 4.25%. Applying that rate to the $776.6 million lump-sum payout results in a state tax bill of approximately $33 million. The state will collect that amount right off the top, since the Michigan Lottery withholds 4.25% before it hands over the prize money.

So, where does that leave our lucky winner? The combined federal and state tax will be about $320.3 million. When you take that out of the $776.6 million one-time payment, that leaves about $456.3 million in the winner's pocket. Not bad for a $2 investment!

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