The winning number for 8th July’s $540 million lottery is 08, 19, 20, 55 and 73 (mega ball 5). The number was picked in Indiana and there is only one winner. This is the seventh largest lottery till date and the third largest Mega Millions lottery. The question is, will the winner get all of it? The answer is no.
The winner will get the full amount ($540 million) only if he or she chooses to receive the money in 30 installments over 29 years. If you want the money in lump sum, you will have to settle for $380 million, which is nearly 30% less than the amount you won.
Federal taxes will take the next biggest bite out of the sum
The next deduction is federal tax. Winnings from lotteries are taxed like ordinary income. If you win a lottery, you are going to be taxed at the highest rate of 39.6%. This will take another big bite out of your winnings. There is little leeway to escape from this tax because a lottery winner is not the kind of tax payer that the government wants to give a tax break to.
The federal government will automatically withhold 25% of this prize if you have a social security number. This will further reduce your winnings by about $95 million. If you don’t have a social security number or if you don’t provide one, 28% of the winnings will be withheld, going up to 30% for a foreigner. You will also have to pay around 14.6% as federal taxes in April 2017.
So, after paying your federal tax obligations, you will be left with around $229.5 million. But there are other deductions too. For example, if you are staying in New York, you have to pay state and local taxes.
Other deductions from the prize money and best states for lottery winners
Together, the state and local taxes will set you back by another 15% of the prize money or $57 million. This further reduces your winnings to $172.5 million. Note that different states withhold taxes at different rates. You may also have to pay taxes in the next tax cycle.
The best states for mega lottery winners are Tennessee, South Dakota, Wyoming, Texas and Washington. There is no personal income tax in these states. Pennsylvania and California are also good in that aspect, since they don’t charge state income tax on lottery winnings if the winning ticket was bought in the state.
The best way to minimize the tax hit is to consult a lawyer, financial adviser and tax planner after winning but before claiming the prize, figure out what to do with the money.