So you didn’t win Tuesday night’s $555 million Mega Millions jackpot. Glass half full view? Phew! You avoided a huge tax bill. Of course, you can take another shot at the next draw to hit a windfall – and then give Uncle Sam a load. The national lottery game’s top prize has soared even further past the half-billion dollar mark and is worth an estimated $630 million for Friday night’s drawing. More from Personal Finance: Airlines grapple with lost and delayed baggage This retirement strategy can help retirees boost savings Before you ‘dividend chase’, here’s what you need to know If he wins that amount, it would mark the fifth-biggest Mega Millions prize ever, but it doesn’t crack the top 10 biggest jackpots of all time. And, it will come with a pretty big tax bill. Whether the prize is taken as an annuity of 30 payments over 29 years or as an immediate, reduced lump sum, taxes end up taking a big bite out of any winnings.
$86.3 million will be withheld immediately
For that $630 million jackpot, the cash option — which most winners choose — is $359.7 million. A mandatory 24% federal withholding tax on that amount would reduce your earnings by $86.3 million. However, because the top federal marginal tax rate is 37% — which applies to income over $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 lower your tax bill is to think philanthropically, according to the American Institute of CPAs: You can contribute cash, up to 60% of your adjusted gross income, to a public charity or donor-supported fund and get a tax deduction for the amount in the year you make the donation. You could also set up a private foundation, donate income to it, and then determine over time how to use it. If you had no income reduction, another 13%, or $46.7 million, would be owed to the IRS ($133 million total). That would reduce the windfall to $226.7 million. There could also be government taxes either withheld or owed. Unless you live where there is no income tax or lottery winnings are not taxed, these contributions could be more than 10%, depending on where you bought the ticket and where you live. However, even after a large tax bill, the windfall would be greater than most people see in a lifetime. Jackpot winners are advised to assemble a team of professionals to help navigate the claiming process, including an attorney, a financial advisor, and a tax advisor. The chance that a single ticket will match all six numbers drawn in Mega Millions is about 1 in 302 million. For Powerball — whose jackpot is estimated at $101 million for Wednesday night’s drawing — it’s 1 in 292 million.
