How Much Tax Will the $1.6 Billion Mega Millions Lottery Winner Have to Pay?
October 24, 2018
The media has been on fire with lottery stories these past few weeks, as the Mega Millions lottery in the U.S. crept ever higher, before finally reaching a near-record breaking $1.6 billion dollars.
Now, it has been revealed that a single ticket sold in South Carolina is the winner- meaning that one person (or group of people) is set to hear life-changing news. While the win is historic, it will also come with a historically high tax bill. Let’s unpack the details.
The Mega Millions lottery is played in 44 states, Washington D.C., and the U.S. Virgin Islands. A ticket costs $2.
The huge jackpot has been building since July 24 of this year, when the last draw that had winning numbers resulted in a group of 11 co-workers in California winning $543 million.
The South Carolina winning ticket beat odds of 1 in 302 million.
Lump Sum vs. Staggered Payments
The first thing that the jackpot winner will have to decide is whether to take their winnings as a lump sum, or whether to have payments doled out annually.
If the winner opts for an immediate lump-sum payment the amount they will take home will be $904.9 million (before taxes). The $1.6 billion sum cited as the jackpot is the amount received if the winner chooses to have their winnings paid out as annuity payments over the course of 30 years.
Once the winner decides on their preferred method of payment, they will face significant tax implications.
A 24% withholding tax will be automatically applied to the winnings. The IRS will take this sum immediately, and the winner will owe the remainder of any applicable taxes in the next tax year (i.e. when filing their taxes in 2019).
In addition to federal taxes, the state where the winner is a resident may also levy taxes.
If the winner lives in South Carolina where the ticket was purchased, his or her winnings will be subject to a 7% state withholding tax applied to lottery winnings.
If the winner is a resident of another state, this state tax rate on winnings may vary, or there may not be an additional state tax at all.
For instance, if the winner was a resident New York State he/she would have to pay an addition 8.82% in state tax, and if they were a resident of New York City they would have to pay an even further 3.876% in local taxes.
Other states withhold taxes at rates ranging anywhere from 2.9% to 8.75%. Maryland and Arizona withhold taxes on lottery winnings from non-residents.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington state, and Wyoming have no state income tax.
California has an exemption on taxing lottery winnings, as long as the ticket is purchased in California.
If the winner is not a U.S. citizen, he or she will face an immediate 30% withholding tax (and potential additional taxes on the winnings in their home country).
New Tax Bracket
In addition to facing withholding taxes at the federal, and possibly state level, the jackpot winner will also be immediately bumped into the highest tax bracket (where the tax rate is 37%).
The winner has 180 days to claim the prize. South Carolina is one of several states that allows lottery winners to withhold their names from the public.
If you have questions about how lottery winnings can impact your wealth and tax planning, contact Feigenbaum Law. We focus on complex tax issues and provide a full range of services to individuals, professionals and corporations throughout North America. Our goal is to create the best tax strategy possible for our clients. We work with you to create a personalized solution that will set you up to take advantage of all possible current and future opportunities to reduce your tax burden. Our focus is complex matters related to tax planning for individuals with high net-worth. We also have significant experience in the administration and litigation of tax matters in the US and Canada.
Call us at (905) 695-1269 or toll free at (877) 275-4792, email us at firstname.lastname@example.org, or contact us using our contact form to learn more about how we can help and to schedule an initial consultation.