Is the Mega Millions cash option already taxed?

However, if the winner opts for an immediate lump-sum cash payment, which most people do, the one-time estimated payout will be $724.6 million. But, in either case, that's before taxes. And make no mistake: The jackpot winner's tax bill will be significant and unavoidable with either option!

kiplinger.com - Mega Millions After Taxes: How Much Will the Winner Get? - Kiplinger

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Make Your Bookie Cry And Pull The Hair By Generating $23,187

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One person in Maine won the $1.35 billion Mega Millions (opens in new tab) jackpot drawing on January 13. That's the second largest Mega Millions prize ever (behind the $1.537 billion bonanza won in October 2018). While that's certainly a life-changing amount for the winner, that person will need to factor in taxes before running out to buy a mansion, yacht, or private island. After taxes on the Mega Millions jackpot are taken out, the winner will actually take home quite a bit less than the $1.35 billion advertised. The lucky winner will still pocket a giant pile of cash, but so will Uncle Sam (and Maine, too). The Mega Millions jackpot of $1.35 billion is the estimated value of annuity payments over 30 years. That's an average of $45 million per year. However, if the winner opts for an immediate lump-sum cash payment, which most people do, the one-time estimated payout will be $724.6 million. But, in either case, that's before taxes. And make no mistake: The jackpot winner's tax bill will be significant and unavoidable with either option! Subscribe to Kiplinger’s Personal Finance Be a smarter, better informed investor. Save up to 74% Sign up for Kiplinger’s Free E-Newsletters Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of expert advice - straight to your e-mail. Sign up [Yours free, New Tax Rules for 2023. Download your free issue of The Kiplinger Tax Letter (opens in new tab) today. No information is required from you.]

When Is the Mega Millions Drawing?

Mega Millions drawings are held each Tuesday and Friday evening at 11:00 p.m. Eastern Time. The cut-off time for buying Mega Millions tickets varies from state to state. So, check with your state lottery for the cut-off time to purchase tickets where you live.

What's the Mega Millions Jackpot After Taxes?

The top federal income tax rate is currently 37%. However, it's scheduled to rise to 39.6% starting in 2026. As a result, if the lucky winner from Friday night's drawing opts for 30 years of annuity payments, the annual federal income tax bill will be in the neighborhood of $16.65 million per year for the first three years (2023 to 2025). The IRS will automatically take 24% of your winnings off the top, and the rest will be due at tax time. Around $17.82 million in federal income tax will be owed, per year, for each of the remaining 27 payments. That comes to a ballpark grand total of about $531.1 million in federal tax. If that's subtracted that from $1.35 billion, the winner is left with $818.9 million to spend…but it will take 30 years to get it all. If the winner takes the $724.6 million lump-sum payment, he or she will pay about $268.1 million in federal income taxes for the 2023 tax year. (Again, the IRS will take 24% right away and expect the winner to pay the remaining tax when filing their 2023 tax return next year.) That reduces the spendable winnings to around $456.5 million.

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That, of course, is less than the total amount pocketed with the annuity, but the winner doesn't have to wait to get it. Receiving the money now also means it can be invested and likely grow it to an amount that surpasses the annuity total. The amount of money the winner pockets will shrink further for another reason: Maine will want a piece of the pie, too. (Since the winning ticket was purchased in Maine, we're assuming the winner is a resident of Maine.) The state will withhold 7.15% of the winnings, which is the same as the state's top income tax rate. If the winner goes with the 30-year annuity option (i.e., $45 million for 30 years), the total Maine tax bill over that time will be roughly $96.5 million. But that's assuming the rates don't change for the next 30 years, which is not likely to happen. Under that scenario, the combined federal and state tax bill will be about $627.6 million, which means approximately $722.4 million. Assuming the winner takes the $724.6 million lump-sum payment, the Maine tax bill comes to an estimated $51.8 million, which reduces the overall take-home amount to about $404.7 million. Either way, that's still not too bad for a $2 ticket!

W-2G Forms for Lottery Winners

The Mega Millions jackpot winner will receive an IRS Form W-2G (opens in new tab) in the mail by January 31, 2024, with the winnings listed in Box 1. The amount withheld for federal and state taxes will also be reported on the form. The IRS will receive a copy of the form, too. So, the winner better not even think about reporting a different amount when filing their 2023 tax return next year!

What About Powerball?

The Powerball (opens in new tab) lottery generally works the same way as Mega Millions. That includes taxes on the Powerball jackpot and reporting with Form W-2G. Powerball drawings are held every Monday, Wednesday, and Saturday night at 10:59 p.m. Eastern Time.

kiplinger.com - Mega Millions After Taxes: How Much Will the Winner Get? - Kiplinger