Hoping To Win The Mega Millions? You’ll Need To Think About Taxes.

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At 11 p.m. Friday, somebody might get very, very lucky.

The jackpot in the Mega Millions drawing is worth about $1.35 billion, one of the largest lottery prizes ever.

Most people who bought a ticket to try their luck are probably daydreaming of quitting their job, traveling the world, buying a mansion – not about handling their newly complicated tax return as a sudden multimillionaire. But big tax bills go hand-in-hand with big wins.

Q: How much will the lottery winner pay in taxes?

A: The IRS views lottery winnings as ordinary income. The top tax bracket for the highest earners in this country – which is where winning the lottery would bump the winner – has a 37 percent tax rate.

Most lottery winners choose to receive their winnings as one lump sum, although they have the option of receiving annual payments for 30 years. The lump sum for the current drawing is about $707.9 million.

Under IRS rules, lotteries automatically withhold 24 percent of any win bigger than $5,000 for federal taxes, meaning that lump sum will have $169.9 million sent to the federal government right away. But the winner might end up actually owing a lot more (or possibly less) when they file their 2023 taxes.

Just how much depends on many factors, including the winner’s other income and filing status. But if it’s a simple case of a single taxpayer with no other income, they would owe about $261.9 million at 2023 tax rates.

Depending on where the winner bought a ticket and where they live, they might owe state and local taxes as well. It’s a mixed picture, since some states don’t participate in Mega Millions, and some don’t tax winnings from their state lotteries, since the proceeds go toward state government programs.

Q: How can lottery winners keep more of their money from getting taxed?

A: Like all taxpayers, lottery winners can take deductions from their income – for example, by donating part of their winnings to charity.

But they also have some more complicated tax decisions to think about.

First, there’s the question of that lump sum versus 30 years of payments. Taxpayers pay only the top tax rate on their income above a certain point – and next year, it will be income above $578,125 for single filers and $693,750 for married couples filing jointly. So in theory, 30 years of payments would let the winner protect some portion of the windfall from taxes each year rather than just shielding that amount once.

But Kurt Panouses, a Florida lawyer who advises winners of big lotteries, says that’s the wrong way to think about it. Someone who just played the Mega Millions odds and won should think next about the odds that our tax system stays stable for the next 30 years – which are slim, in Panouses’s view.

Today’s top tax bracket of 37 percent is far lower than the 70 percent rates of the early 1980s, or the 91 percent rates of the early 1960s. “The 37 percent you pay now in 2023 . . . is really a low income tax bracket,” Panouses said. He predicts that rate will go up over the next three decades, leaving the lottery winner paying a higher rate: “That’s a big reason why a lot of people will take the lump sum all in one year and be done with it. You pay 37 percent and you’re done.”

Panouses also advises clients to think about estate planning before they go claim their winnings. Unless they spend it all in their lifetime, the winner won’t just pay income taxes on the earnings now. If they die with more than $12.9 million left, almost 40 percent of what remains will go to the federal government due to the estate tax.

To avoid that hit, Panouses says winners should consider sharing the wealth while they are still alive by doling it out to their family members. He advises setting up a trust that will claim the lottery winnings, which can pay out a portion of the winnings directly to each person that the winner wants to name as a beneficiary. The winner’s relatives will pay income taxes right away on most of their share of the jackpot, but the overall estate tax burden will be smaller.

Q: This all sounds like a pain. Is it worth it?

A: We can try to answer that question either with math, or with more nebulous notions.

Mathematically: Anyone who buys a lottery ticket should usually expect to lose. But when the jackpot gets big enough, that isn’t necessarily true.

A Mega Millions ticket costs $2. The odds of winning big are 1 in 302,575,350. The current jackpot is big enough that playing the lottery is a positive value proposition, in theory: For every $2 ticket that you buy for a shot at $1.35 billion, the laws of probability say that you should “expect” to win $4.46.

But the share that goes to taxes actually flips that probability. If you’re not taking home $1.35 billion but instead a $707 million lump sum minus about $261 million in taxes, the expected value of a $2 ticket drops to $1.47.

In other words, mathematicians would say this just went from a good bet to a bad bet.

Perhaps you’re more interested in the wide variety of anecdotal outcomes from previous big winners. Some people used the money to quit their jobs, give to charity, or even build a water park. Others saw their happy luck turn to disaster when they spent it all, wrecked relationships, or became victims or perpetrators of financial crimes. Or you’re intrigued by psychology research showing lottery winners don’t end up much happier in the end than people in far more modest circumstances.

Panouses has represented enough big winners to see the good and bad. And perhaps unsurprisingly, he recommends winning the lottery.

The financial decisions are tough at first, he said. “They’re thinking about what they can do with this money. All their issues go away with this ticket with six numbers on it, and they’re not thinking clearly any longer,” he explained. “It’s difficult. But at the same time, it’s so easy for them. They wake up in the morning and they just go, ‘I don’t have to do anything today,’ and that’s a good feeling.”

“Anyone in their family, if they have an emergency, they can take care of it,” he said. “Yeah. It’s worth going through all the hoops.”

Q: What about the rest of us who don’t win the lottery?

A: All taxpayers should know that they do owe the IRS taxes on their gambling earnings, even if it’s a far more modest take from a good night at a casino rather than a life-changing sum.

On the flip side, taxpayers can subtract their gambling losses – but only up to the amount that they won. If you lose more gambling than you win, it won’t help reduce your tax bill.

And they should keep in mind that most lotteries are a bad bet, statistically.

Panouses said that on Tuesday, when no one won Mega Million’s $1.1 billion drawing and the jackpot jumped to $1.3 billion, he got more than 10 calls from people who were so certain they were the future winner that they already wanted to consult a lawyer who specializes in advising lottery winners.

“It was divine intervention that they were supposed to win,” Panouses said. “It’s one thing to be able to dream and have fun, but some of these people spend a lot of money buying tickets. . . . It’s just sad.”

He advises that we should not think about the taxes that one newly ultrarich winner will pay. “The lottery is really a poor man’s tax,” Panouses said. “By having those lottery funds come in, the government doesn’t have to tax wealthier people. We save income taxes, because education’s being funded by the lottery. . . . Unfortunately, the wrong people spend a lot of money on the lottery.”

(c) 2023, The Washington Post · Julie Zauzmer Weil 


5 COMMENTS

  1. What happens if I donate my ticket to chaity. Will that get taxed or since it is owned by a tax exempt entity they keep the whole sum?

  2. And no, the Net Investment Income Tax (NIIT), that extra 3.8% levy on certain investment income, doesn’t apply to lottery winnings.

    the top end of the spectrum, California imposes a whopping 13.3% for high incomes. But there’s a catch (there’s always a catch). California is one of those states that doesn’t impose a state tax on lottery winnings. If you take California out of the equation, you’ll likely pay the most state taxes in Connecticut, Hawaii, Maryland, New Jersey, New York, North Dakota, Ohio, Vermont, and Wisconsin.

    Check the Tax Foundation website for more information

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