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If you manage to beat the odds and land the next Mega Millions jackpot, don’t forget that Uncle Sam will snatch a slice of the windfall.
The top prize has surged to $790 million for Tuesday night’s drawing after no ticket matched all six numbers pulled Friday night. If won at that amount, it would mark the fourth-largest lottery prize ever awarded.
And, it would come with a sizable tax bill. Whether the prize is taken as an annuity of 30 payments over 29 years or as an immediate, reduced cash lump sum, taxes end up taking a big bite out of any winnings.
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For this $790 million jackpot, the cash option — which most winners choose — is $464.4 million. A mandatory 24% federal tax withholding on that amount would reduce your winnings by about $111.4 million.
However, because the top federal marginal tax rate is 37% — which applies to income above $539,900 as a single taxpayer or $647,850 for married couples filing jointly — you could expect to owe more at tax time.
One way to reduce your tax bill is to think charitably, according to the American Institute of CPAs: You can contribute cash, up to 60% of your adjusted gross income, to a public charity or a donor-advised fund and get a tax deduction for the amount in the year you make the donation. You could also create a private foundation, donate income to it and then determine over time how to employ it.
If you had no reduction in income, another 13%, or $60.4 million, would be due to the IRS ($171.8 million in all).
That would reduce the windfall to $292.6 million.
There also could be state taxes either withheld or due. Unless you live where there’s no income tax or lottery wins aren’t taxed, those levies could be more than 10%, depending on where you bought the ticket and where you live.
Nevertheless, even after a big tax bill, the windfall would be more than most people see in a lifetime. It’s recommended that jackpot winners assemble a team of professionals to help navigate the claiming process, including an attorney, financial advisor and tax advisor.
The chance of a single ticket matching all six numbers drawn in Mega Millions is about 1 in 302 million. For Powerball — whose jackpot is an estimated $130 million for Monday night’s drawing — it’s 1 in 292 million.