Mega Millions: $1.337 Billion Jackpot Tax

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Congratulations to the lucky winner who had the only ticket that matched all six Friday numbers Mega Millions draw. But there are two other entities that 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 taxman claims their cut.

The advertised jackpot – $1.337 billion – is the value of annuity payments over 30 years. This represents an average of approximately $44.57 million per year. If the winner opts for an immediate lump sum cash payout (which most people do), the payout will be reduced to $780.5 million. But, in both cases, it is before taxes. And make no mistake: the winner’s tax bill will be large and inevitable anyway!

Federal taxes on the Mega Millions jackpot

Let’s take a look at Uncle Sam’s cut first. The top federal tax rate is currently 37%. However, it is expected to rise to 39.6% from 2026. Therefore, if the winner opts for 30 years of annuity payments, they will pay approximately $16.49 million in federal income tax per year for the first time. four years (2022 to 2025). (The IRS will automatically take 24% of the winnings on top, and the winner will owe the rest at tax time.) The lucky winner will owe approximately $17.65 million per year for the remaining 26 payments. This amounts to an approximate total of approximately $524.85 million in federal taxes. 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, they will pay approximately $288.8 million in federal income tax for the 2022 tax year. (Again, the IRS will immediately take 24 % and wait for the rest when the winner files a 2022 tax return.) This reduces the winner’s spendable earnings to approximately $491.7 million. This, 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 to an amount that exceeds the total annuity 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 assume the winner lives there.) Illinois has a flat tax rate of 4.95%. If the winner chooses the 30-year annuity option, the tax on the average annual payout of $44.57 million rises to just over $2.2 million per year. Multiply the annual tax by 30 and you get a grand total of approximately $66.2 million in total Illinois tax paid during the annuity period. Coupled with the estimated federal tax under the annuity option ($524.85 million), that leaves an estimated tax bill of $591.05 million – and $745.95 million. Not bad for a $2 investment!

If the winner takes the lump sum of $780.5 million, applying the 4.95% Illinois tax rate to the one-time payment results in a state tax bill of approximately $38.63 million of dollars. The state will collect this amount upfront, since the Illinois Lottery withholds the state cup before awarding the prize money. So, with a lump sum payment, the combined federal and state tax will be approximately $327.43 million. When you take that out of the $780.5 million payout, that leaves about $324.2 million in the winner’s pocket. It’s always an amount that changes the life of the winner!

Reporting Earnings to the IRS

Finally, you will receive an IRS Form W-2G by mail by January 31, 2023, with your earnings shown in box 1. The amount withheld for federal and state taxes will also be shown on the form. Remember that the IRS will also receive a copy of the form. So don’t even think about declaring a different amount when you file your 2022 tax return next year!

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