MARK RALSTON | AFP | Getty Images
So you didn’t win the $555 million Mega Millions jackpot Tuesday night.
The glass half-full view? Phew! You dodged a huge tax bill.
Of course, you get another shot in the next drawing to land a windfall — and then give a boatload of it to Uncle Sam. The national lottery game’s top prize has rolled even further past the half-billion-dollar mark and is worth an estimated $630 million for Friday night’s pull.
More from Personal Finance:
Airlines are struggling with lost and delayed bags
This withdrawal strategy can help retirees stretch savings
Before you ‘chase dividends,’ here’s what to know
If won at that amount, it would mark Mega Millions’ fifth-largest prize ever, but does not crack the top 10 biggest jackpots of all time.
And, it would come with a sizable tax bill. Whether the prize is taken as an annuity of 30 payments over 29 years or as an immediate, reduced cash lump sum, taxes end up taking a big bite out of any winnings.
$86.3 million would be withheld right off the bat
For this $630 million jackpot, the cash option — which most winners choose — is $359.7 million. A mandatory 24% federal tax withholding on that amount would reduce your winnings by $86.3 million.
However, because the top federal marginal tax rate is 37% — which applies to income above $539,900 as a single taxpayer or $647,850 for married couples filing jointly — you could expect to owe more at tax time.
One way to reduce your tax bill is to think charitably, according to the American Institute of CPAs: You can contribute cash, up to 60% of your adjusted gross income, to a public charity or a donor-advised fund and get a tax deduction for the amount in the year you make the donation. You could also create a private foundation, donate income to it and then determine over time how to employ it.
If you had no reduction in income, another 13%, or $46.7 million, would be due to the IRS ($133 million in all).
That would reduce the windfall to $226.7 million.
There also could be state taxes either withheld or due. Unless you live where there’s no income tax or lottery wins aren’t taxed, those levies could be more than 10%, depending on where you bought the ticket and where you live.
Nevertheless, even after a big tax bill, the windfall would be more than most people see in a lifetime. It’s recommended that jackpot winners assemble a team of professionals to help navigate the claiming process, including an attorney, financial advisor and tax advisor.
The chance of a single ticket matching all six numbers drawn in Mega Millions is about 1 in 302 million. For Powerball — whose jackpot is an estimated $101 million for Wednesday night’s drawing — it’s 1 in 292 million.
