Mega Millions and Powerball jackpots reach new heights.  Here’s what the winner will take home after taxes.

Two multistate lotteries simultaneously boast huge jackpots. After 30 no-win drawings, the Mega Millions jackpot stands at $1.1 billion and the Powerball prize is worth approximately $865 million.

The odds of winning the lottery jackpot are slim — 1 in 292.2 million for Powerball and 1 in 302 million for Mega Millions, to be exact — but we’re saying there’s a chance.

So imagine for a moment that you win. How much of the prize would you take home after taxes? We’ll break it down and suggest five ways to invest your earnings safely.

How are lottery winnings taxed?

No matter how lucky you are, Uncle Sam will still come knocking. The IRS taxes lottery prizes differently depending on how the winner chooses to be paid. You have two options: lump sum payment or annual payment spread over 30 years. In truth, most lottery winners opt for the cash lump sum upfront, even though it ultimately means fewer dollars in their pocket, but still a lot.

How do you file federal taxes on a lump sum payment? The federal tax rate on any prize over $5,000 is 24%, which is immediately deducted from your winnings. And for a big prize like the Mega Millions, that lump sum will also catapult you into the highest income tax bracket, so you’ll pay the top federal tax rate of 37% the following year.

The annuity option, which acts as a hedge against high inflation, gives you the full $1.1 billion prize pool over a longer time frame. But you’ll still see that 24% deducted from the top of each payment. You will also be in the highest federal income bracket and will have to pay any federal taxes owed on top of your withholding tax.

There is also the state tax bill

Just when you thought you’d paid the piper, here comes the state taxes. The amount of state income taxes depends on where you live. New Yorkers pay the highest state tax rate of 13%, but the applicable state tax rate across the country ranges from 2.9% to 8.82%.

If you’re very lucky, you may live in one of these states that doesn’t charge state income tax:

  • Alaska

  • Florida

  • New Hampshire

  • Nevada

  • South Dakota

  • Tennessee

  • Texas

  • Wyoming

  • Washington

What would you pocket after paying taxes on Mega Millions?

Odds aside, let’s say you’re the incredibly lucky winner of the $1.1 billion Mega Millions jackpot. If you choose the lump sum payment, you will be paid $537.5 million up front.

However, since your winnings are also subject to a 24% tax withholding, that cash value means you’ll walk away with “only” $408.5 million to put in the bank. Depending on your filing status the following year, that sum is also subject to a tax rate of up to 37%, meaning you’ll pay a lot more to Uncle Sam at tax time. (You’d still be a millionaire many times over, don’t forget.)

If you’re willing to wait three decades, annual payments start at $17 million the first year and increase 5% each year, reaching $70 million by the 30th year. This is before federal and state taxes.

What would you pocket after paying taxes on Powerball?

Now, let’s say someone else wins the Mega Millions. You still have a chance at Powerball. If you win and choose the lump sum, you’ll take home $413.6 million up front.

Then comes the 24% withholding tax, which means your cash value drops to $260.6 million. Then, next April, your marginal tax rate will be 37% and you’ll pay another chunk of your wealth to the government.

With the annuity option, annual payments start at $13 million, increase 5% each year, and eventually level out at nearly $54 million, before taxes.

If you want to run the numbers and see the fine print, you can use the Powerball tax calculator to learn more.

5 investments that yield lottery winnings

Enough with the tax talk. Let’s say you hit the jackpot (literally) and joined the billionaire club. Here’s what experts say lottery winners should do to maximize their winnings and ensure a less stressful financial future.

1. Hire a financial advisor

Before you even show up to claim your check, it makes sense to hire a financial advisor and a tax attorney or accountant who can help you manage your tax liabilities and invest the money wisely.

2. Diversify your banking strategy

You may think you are responsible for depositing money in the bank, but remember that banks are only insured for deposits up to $250,000. So be intentional about where you put your money and how you divide it.

Learn more about high yield savings, money marketAND CD Savings Accounts.

3. Pay off outstanding debts

It will be a great relief to live debt-free, potentially for the first time. Paying off outstanding loans such as mortgages or credit card debt is generally a smart idea as it prevents interest from accumulating. However, keep an eye on your credit scores before you commit to living with cash on hand.

4. Invest wisely

Having extra income might tempt you to try new investment strategies, but be careful about jumping head first into financial products you don’t understand. Stick to lower-risk investments like safer bonds and stocks for the first few months before branching out and educate yourself on the power of compound interest.

5. Consider creating a charitable foundation

While you may choose to keep the fact that you won the lottery hidden, family and friends will inevitably find out. It is helpful to establish a charitable foundation to handle requests or donation strategies that do not result in an additional tax burden.

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *