The $1 billion Mega Millions jackpot has generated a lot of speculation about the best ways to spend that much money. In reality, though, the winner will end up with far less than that after taxes on your lottery winnings are taken out. So, if you bought a ticket for tonight's drawing and are feeling lucky, read this before you buy a private island or professional sports team.
$1 billion is the estimated value of annuity payments over 30 years. If you opt for an immediate lump-sum cash payment, your payout will be a mere $739.6 million—before taxes. And make no mistake: Your tax bill will be significant and unavoidable.
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 you'll pay about $273.6 million in federal income taxes if you take the lump sum, reducing your spendable winnings to around $466 million. (The IRS will automatically take 24% of your winnings, and you'll owe the rest at tax time).
Your state may want a piece of the pie, too. Residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are off the hook because those states have no income taxes. (Alaska and Nevada don't sell Mega Millions tickets, but residents can buy them out-of-state.) California winners also get a break because the state exempts state lottery winnings from taxes—as long as you buy your ticket in California. But if you live in another state where Mega Millions lottery tickets are sold, you'll have to pay state income taxes at top rates ranging from 2.9% (North Dakota) to 10.75% (New Jersey). Also expect some state taxes to be withheld from your jackpot payout if you bought your winning ticket in a state with an income tax.
You'll receive an IRS Form W-2G in the mail by January 31, 2022, 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 2021 tax return next year!
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January 22, 2021 at 07:55PM
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How Much Tax You Will Pay on Your Lottery Winnings? - Kiplinger's Personal Finance
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