What's the Tax on the Mega Millions Jackpot?
A winning ticket for the recent $1.337 billion Mega Millions jackpot was purchased in Illinois. After taxes are taken out, how much will the winner receive?
Congratulations to the lucky winner who had the only ticket that matched all six numbers in the recent Mega Millions lottery drawing. But there are two other entities who also won big – the federal government and the state of Illinois. That's because, between the two, they're going to get a big chunk of the $1.337 billion jackpot once the tax man claims his share.
The announced jackpot – $1.337 billion – is the value of annuity payments over 30 years. That's an average of approximately $44.57 million per year. If the winner opts for an immediate lump-sum cash payment (which most people do), the payout will be cut down to $780.5 million. But, in either case, that's before taxes. And make no mistake: The winner's tax bill will be significant and unavoidable either way!
Federal Taxes on the Mega Millions Jackpot
Let's take a look at Uncle Sam's cut first. The top federal income tax rate is currently 37%. However, it's scheduled to rise to 39.6% starting in 2026. As a result, if and the winner opts for 30 years of annuity payments, he or she will pay something in the neighborhood of $16.49 million in federal income tax per year for the first four years (2022 to 2025). (The IRS will automatically take 24% of the winnings off the top, and the winner will owe the rest at tax time.) The lucky winner will owe around $17.65 million per year for the remaining 26 payments. That comes to a ballpark grand total of about $524.85 million in federal tax. If you subtract that from $1.337 billion, that leaves the winner with $812.15 million to spend…but it will take 30 years to get it all.
If the winner takes the $780.5 million lump-sum payment, he or she will pay about $288.8 million in federal income taxes for the 2022 tax year. (Again, the IRS will take 24% right away and expect the rest when the winner files a 2022 tax return.) That reduces the winner's spendable winnings to around $491.7 million. That, of course, is less than the total amount pocketed with the annuity, but the winner won't have to wait to get it. Receiving the money now also means it can be invested immediately and likely grow it to an amount that surpasses the annuity total in less than 30 years.
State Taxes on the Mega Millions Jackpot
Now it's Illinois' turn. (Since the winning ticket was purchased in Illinois, we're assuming the winner lives there.) Illinois has a flat income tax rate of 4.95%. If the winner selects the 30-year annuity option, the tax on the average annual payment of $44.57 million comes to a bit over $2.2 million per year. Multiply the annual tax by 30 and you get a grand total of around $66.2 million in total tax paid to Illinois over the annuity period. When coupled with the estimated federal tax under the annuity option ($524.85 million), that leaves a combined estimated tax bill of $591.05 million – and an estimated $745.95 million. Not bad for a $2 investment!
If the winner takes the $780.5 million lump sum, applying Illinois' 4.95% tax rate to the one-time payout results in a state tax bill of approximately $38.63 million. The state will collect that amount right off the top, since the Illinois Lottery withholds the state's cut before it hands over the prize money. So, with a lump-sum payment, the combined federal and state tax will be about $327.43 million. When you take that out of the $780.5 million payment, that leaves about $324.2 million in the winner's pocket. That's still a life-changing amount for the winner!
Reporting Winnings to the IRS
Finally, you'll receive an IRS Form W-2G in the mail by January 31, 2023, with your winnings listed in Box 1. The amount withheld for federal and state taxes will also be reported on the form. Don't forget that the IRS will receive a copy of the form, too. So, don't even think about reporting a different amount when you file your 2022 tax return next year!