If you hate paying taxes, at least it’s a reason to pretend you’re glad you never win big in the lottery.
So far this year, the 12 winners who have hit Powerball and Mega Millions jackpots — worth an advertised $3.3 billion in all — have collectively fed roughly $505.5 million to the IRS. And that won’t be the last of it.
“There is still a sizable tax bill coming, for sure,” said April Walker, lead manager for tax practices & ethics at the American Institute of CPAs.
Whether winners go with the immediate, reduced cash option (most do) or an annuity stretched across three decades, 24% is withheld for federal taxes. Yet because the top tax rate of 37% is applied to income above $510,300 (single tax filers) and $612,350 (married couples filing jointly), more will be owed at tax time.
A customer purchases Powerball lottery tickets for a $700 million jackpot at a newsstand in New York City, August 23, 2017.
Brendan McDermid | Reuters
So far this year, Powerball and Mega Millions have each had six jackpot winners. In all instances, the cash option was chosen instead of the annuity.
For Mega Millions — with winning jackpots ranging from $168 million to $522 million — winners’ cash options have totaled $1.06 billion. The 24% federal tax withholding totaled $254.3 million, reducing the collective take to $805.75 million.
Powerball winners’ cash options also have totaled just over $1 billion, with jackpot amounts ranging from $80 million to $768.4 million. After the 24% federal withholding of $251.1 million, winners were left with $789.9 million.
For illustration purposes: If winners were unable to reduce their taxable income at all, another 13% — the difference between the 24% withheld and the top tax rate of 37% — would be due to Uncle Sam. Collectively, that would be another $273.9 million or so going to federal coffers ($779.4 million altogether).
Of course, those lottery wins contribute just a drip in the federal tax bucket. Income taxes paid by individuals will account for about $1.8 trillion, or 50%, of the government’s estimated $3.6 trillion in revenue for fiscal year 2020.
Local coffers also benefit as well. Depending on where the ticket was purchased, state taxes ranging from zero to more than 8% also would be applied.
Like the federal withholding rate on jackpot wins, the amount withheld for state taxes might also be less than what you’ll owe.
“They might withhold at, say, 5%, but the rate you pay might be 6%,” Walker said.
“Winners have to plan for any additional amount that will be due next April to the IRS and the state,” she said.
There are ways to reduce the amount of winnings that gets taxed, although not many. The charitably inclined can lower their taxable income by making a cash donation of up to 60% of their adjusted gross income and carry forward, up to five years, any excess amount.
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Some lottery winners set up their own charitable foundation or similar option, such as a donor-advised fund, and donate a portion of their windfall to it.
“That would be a way to direct charitable contributions over a period of time but take the deduction in 2019,” Walker said.
Powerball’s jackpot is $140 million ($96.4 million cash option) for Wednesday night’s drawing. The Mega Millions’ jackpot is $118 million (cash option of $79.3 million), with the next drawing Friday night.
Your chance of winning Powerball is about 1 in 292 million. For Mega Millions, it’s 1 in 302 million.