One lucky individual from New Jersey has officially won the $1.128 billion Mega Millions jackpot, marking the game’s fifth-largest grand prize in history. This winner now faces a difficult decision between taking the annuitized prize spread out over time or a lump-sum payout of $536.6 million in cash.
The Tax Bite
Unfortunately, winning a massive jackpot like this comes with a hefty price tag in the form of taxes. According to experts, regardless of the payout option chosen, nearly half of the winnings will be lost to taxes. For example, winners in New Jersey will face taxes on prizes over $10,000, with millions owed to the state in addition to federal taxes.
Before the winner can even think about enjoying their prize money, they will have to deal with a 24% mandatory upfront federal withholding to the IRS. This withholding reduces the cash option prize by around $129 million. Furthermore, the winner will also be pushed into the top federal tax bracket of 37% for 2024, potentially resulting in an additional 13% owed in federal taxes, which could amount to about $70 million.
On top of federal taxes, New Jersey automatically withholds 8% for payouts exceeding $500,000. This state withholding will cost the winner an additional $43 million upfront. While this does cover a portion of the state tax bill, New Jersey’s top tax bracket is 10.75%, leaving the winner with more taxes to pay.
Unforeseen Tax Consequences
Many lottery winners fail to consider the tax implications of their windfall until they are faced with a significant portion of their winnings going towards taxes. This lack of foresight can result in a rude awakening when tax season rolls around, leaving winners with less money than they initially anticipated.
Calculating the exact tax bill for the Mega Millions winner is not a simple task, as it depends on various factors such as other income, credits, and deductions. Additionally, the winner will need to account for possible state taxes in states that do not offer tax exemptions on lottery winnings.
Powerball Jackpot
While the Mega Millions jackpot has been claimed, the Powerball jackpot remains up for grabs, currently estimated at $865 million. With odds of roughly 1 in 292 million, winning such a prize carries the same tax implications and financial considerations as the Mega Millions jackpot.
While winning a massive lottery jackpot like the Mega Millions may seem like a dream come true, the reality is that a significant portion of the winnings will be lost to taxes. It is crucial for winners to carefully plan for the tax consequences of their windfall in order to avoid any financial surprises down the line.