The Mega Millions lottery draws happen twice a week on Tuesday and Friday nights. The jackpot starts at $20 million and continues to grow until someone wins it. With the right numbers, you could take home a massive jackpot. But how much exactly would you get to keep if you won?
How the Mega Millions Jackpot Works
The Mega Millions jackpot keeps growing until someone matches all 6 numbers correctly. The numbers come from two separate pools – 5 white balls numbered 1-70 and 1 gold Mega Ball numbered 1-25. To win the jackpot you’ll need to match all 6 numbers drawn.
Once someone wins the jackpot, the prize resets to the starting amount of $20 million for the next draw. The overall odds of winning the Mega Millions jackpot are about 1 in 302 million.
Mega Millions Jackpot Cash Option
When you win the Mega Millions jackpot, you get two choices for how to receive the money – the annuity option or the cash option.
The annuity option gives you the full advertised jackpot amount, paid out over 29 years in 30 graduated payments. Most jackpot winners take the cash option instead, which is a one-time lump-sum payment equal to the jackpot prize pool.
The cash value is typically 50-70% of the annuity amount. For example, if the annuity jackpot is $1 billion, the cash value might be $500 million. This upfront lump sum gets hit with federal and possibly state taxes immediately, compared to the annuity which is taxed incrementally.
Federal Tax on Lottery Winnings
For U.S. citizens, lottery winnings are subject to federal tax withholding. The IRS treats lottery winnings like ordinary income, so they get taxed at the winner’s top marginal tax rate.
Federal tax rates range from 10% to 37% depending on your total taxable income amount for the year. This means if you have a high income, you’ll pay the highest rate on your lottery winnings.
The current federal tax brackets are:
| Tax Rate | Taxable Income Bracket |
| 10% | $0 to $10,275 |
| 12% | $10,276 to $41,775 |
| 22% | $41,776 to $89,075 |
| 24% | $89,076 to $170,050 |
| 32% | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 |
| 37% | Over $539,900 |
For a Mega Millions jackpot cash prize, the lottery operator will immediately withhold 24% for federal taxes before paying out the balance. However, the winner remains responsible for paying any additional federal tax they owe once they complete their tax return for the year.
State Tax on Lottery Winnings
In addition to federal tax, 13 states also tax lottery winnings for residents who win:
- Arizona
- California
- Connecticut
- Delaware
- Georgia
- Massachusetts
- Minnesota
- New Jersey
- New York
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
State tax rates range from 3-8% of the prize amount, depending on the state. Some states allow you to choose between having tax withheld from your prize or paying it directly when you file your tax return.
After-Tax Value of Mega Millions Jackpot
To determine your after-tax jackpot amount, start with the Mega Millions cash value. Then subtract the automatic 24% federal tax withholding along with any state tax that gets taken out upfront.
This will give you the preliminary cash payout amount. However, you may still owe additional federal and state taxes when you file your tax return for the year, especially if you have other sources of income.
For example, let’s say the Mega Millions jackpot is $1.5 billion and you win. If you take the cash option, your pre-tax amount is $780 million (52% of the annuity value). Now let’s look at the after-tax amounts:
- Federal tax withholding (24%) = $187 million
- State tax withholding (8%) = $62 million
- Preliminary cash payout = $531 million
This example has $249 million, or 32% of the jackpot, withheld upfront for taxes. However, you may owe even more federal and state tax once you report the income. This could easily take another 10-20% bite out of your lottery winnings.
It’s also important to note that the annual tax exemption for gift giving is only $16,000 in 2023. So you won’t be able to give away millions tax-free to friends and family.
Ways to Reduce Taxes on Lottery Winnings
Here are some tips to help reduce taxes and maximize your lottery jackpot amount:
- Claim your winnings through an anonymous trust or LLC to keep your identity private and avoid higher tax rates if you have a high income.
- Consult a tax professional to employ strategies to offset the tax impact, such as maximizing deductions.
- Don’t take the annuity option, as taxes consume more of your winnings over the long run.
- Consider moving to Florida, Texas, Washington or another state with no income tax prior to claiming your prize.
Other Costs That Eat Into Winnings
Taxes aren’t the only factor that can significantly reduce a massive lottery jackpot. Here are some other costs winners need to think about:
- Lawyer fees – It’s wise for big lottery winners to hire lawyers to provide guidance on legal and financial planning.
- Financial advisor – A fee-only financial advisor can help manage investments and plan your newfound wealth.
- Accountant – An accountant can assist with tax planning for lottery winnings.
- Security – You may want to upgrade home and personal security with guards, alarm systems, etc.
- Insurance – Certain insurances become more important, like liability and umbrella policies.
While the above costs may only total 1-3% of your jackpot, other lifestyle factors could affect your bank balance over time. It’s estimated that nearly one-third of lottery winners eventually go bankrupt after lavish spending on cars, real estate, travel, parties, family gifts, and bad investments. Winning the lottery can dramatically change every aspect of your life overnight.
What $500 Million Mega Millions Winnings Look Like
Here’s an example breakdown of what you might take home from a $500 million Mega Millions cash jackpot:
- Pre-tax cash value: $500 million
- Federal tax withholding (24%): $120 million
- State tax withholding (8%): $40 million
- Preliminary cash payout: $340 million
- Additional federal & state taxes (estimated): $60 million
- Net cash after taxes: $280 million
- Lawyers, advisors, security (2%): $5 million
- Spendable cash: $275 million
Keep in mind you don’t have to accept the full pre-tax amount. You could take a smaller pre-tax prize to bypass hitting the highest federal tax bracket. This chart shows the take home amounts based on various pre-tax prizes:
| Pre-Tax Prize | After-Tax Amount |
|---|---|
| $300 million | $225 million |
| $400 million | $300 million |
| $500 million | $275 million |
As you can see, the after-tax amount declines after $400 million due to reaching the top 37% tax bracket. You would want to discuss the specific tax implications with a professional before making a final decision.
Should You Take the Annity or Cash Option?
The choice between the annuity and cash value depends on your goals and circumstances. Here are some of the key factors to consider:
- Liquidity – The cash option provides immediate access to millions for major purchases and investments.
- Tax implications – Cash payouts incur more taxes upfront. Annuities have taxes spread out over 30 years.
- Restrictions – Annuity payments can’t be accelerated and have restrictions like prohibiting using the payments as collateral for a loan.
- Inflation – The annuity protects against inflation over the 30-year payout period.
- Rate of return – Investing a lump sum may generate higher long term returns than the annuity.
- Life changes – Health issues or other circumstances could alter your timeframe for needing the money.
Younger lottery winners lean toward the cash payout option for flexibility and investment opportunities. Older winners may prefer the annual annuity payments to ensure steady income over their lifetime.
What to Do If You Win Mega Millions
Here are some tips if you’re lucky enough to win a Mega Millions jackpot:
- Sign the back of your winning ticket and keep it somewhere secure.
- Call a lawyer and financial advisor for guidance on claiming your prize and managing your wealth.
- Don’t go public right away until you have a plan in place for privacy and security.
- Double check the requirements and deadlines for claiming your prize.
- Decide if you want to remain anonymous. Some states allow winners to claim through a trust.
- Consider the tax implications in the state where you purchased the ticket.
- Determine the right tax withholding option for you – lump sum or annually.
- Make copies of both sides of the ticket. Store one copy securely in case anything happens to the original.
- Assemble a team of professionals (lawyer, accountant, financial advisor) to help advise you.
- Stick to your normal routine as much as possible and avoid making quick major lifestyle changes.
The Chances of Winning
Your odds of winning the Mega Millions jackpot are about 1 in 302 million for each $2 ticket. To put that in perspective, you are:
- 5 times more likely to get struck by lightning in your lifetime
- 57 times more likely to die in a car accident
- 207 times more likely to die in a pedestrian accident
- 21 times more likely to die by accidental poisoning
- 1,746,240 times more likely to die from heart disease or cancer
The overall chance of winning any Mega Millions prize (not just the jackpot) is around 1 in 24. But your odds increase dramatically if you buy more tickets. Buying 100 tickets boosts your Mega Millions odds to 1 in 302.
Should You Play Mega Millions?
Playing the lottery is entertaining for many people, much like going to a sporting event or concert. For $2 a ticket, you get to fantasize about winning big. That small amount is worth it to some people for the excitement it brings.
However, playing with the expectation that you are likely to win is foolish. Your chance of winning is infinitesimally small, even if you spend hundreds or thousands of dollars on tickets. Lottery games should be viewed as entertainment, not as a retirement investment strategy.
If you do spend significant money playing Mega Millions frequently, you may want to reevaluate your budget. That money could be going toward more productive savings or investments. But an occasional ticket or two is fine for most people for the entertainment value alone.
Frequently Asked Questions
Can you remain anonymous if you win Mega Millions?
Some states allow you to claim lottery winnings anonymously, but others require your identity to be public. Delaware, Kansas, Maryland, North Dakota and Ohio all permit anonymity when collecting Mega Millions jackpot prizes through a trust.
What are the tax rates in other countries for lottery winnings?
Tax rates vary significantly by country. Some examples of national lottery tax rates include 20% in Austria, 35% in Canada, 12.5% in Ireland, 15% in New Zealand, and 10-20% in the UK.
Can you gift some of your lottery winnings tax-free?
The annual federal gift exclusion is only $16,000 for 2023. This means you would owe gift tax on any amount exceeding that $16,000 limit that you gift to an individual in a calendar year.
Are lottery winnings considered marital property?
Lottery winnings acquired during your marriage would generally be considered marital or community property. How they are divided in a divorce could vary depending on state law.
Can you form a trust after winning the lottery?
You can create a trust and transfer your winnings into it after receiving them. A benefit is being able to claim prizes anonymously in trust. A trust can also help manage the assets and distribute funds.
Conclusion
Winning a massive lottery jackpot can seem like a dream come true. But the reality is you only end up taking home about half of the advertised prize after federal and possibly state taxes.
Unless you live in a state with no income tax, you can expect to immediately lose around a third of your winnings off the top. And additional income and investment taxes will continue eating into your Mega Millions prize over time.
Careful planning is necessary to reduce taxes and wisely manage your new wealth. Hiring experienced professionals like a lawyer and financial advisor is highly recommended to protect your interests.
The chances of winning Mega Millions are incredibly low. But for $2 a ticket, some occasional small-stakes play can be worthwhile entertainment. Just don’t go overboard with expectations or budget.
