If I Hit the Mega Millions…
Categories: Entertainment, Featured, Personal Finance
…I will pay a boatload in taxes.
The Mega Millions jackpot has reached a record high of of $640 million, shattering the previous U.S. record of $390.
Coworkers are pooling money to buy tickets on their lunch breaks, local liquor stores and bodegas are crowded with anyone feeling even remotely lucky, and Twitter users are fantasizing about blowing the money on everything from classic cars to cupcakes to AK-47s.
But no matter who is lucky enough to win the money, there’s one sure thing they’ll be spending it on: taxes. Before you start training those baby snakes to kill Congressmen, you’ll have to pony up to Uncle Sam a pretty hefty chunk of change.
The federal tax rate on gambling winnings of this sort is a whopping 25%. Then after you factor in state and in some cases city taxes, that’s about a third of your winnings down the drain right off the bat. Exactly how much depends on how you opt to get paid.
If you choose the lump-sum you get $462 million upfront. Depending on your specific tax situation, a whopping $157 million of that goes straight to taxes, leaving you with about $305 million. Alternately, you could choose to receive annual payments, which would amount to about $20 million every year for 26 years. But that means you have to kick $6.8 million dollars over to the IRs, leaving you with the still not too shabby sum of $13.2 million as an annual income.
Before you rush off end world hunger with a boatload of Ramen Noodles, you might want to consider a little tax planning. Purely from a tax perspective, the best thing to do is take the lump sum. Almost everyone expects tax rates to rise at the end of the year or very soon after.
Taking all of your winnings now might save you some money, but it won’t do you any good if you just run off and spend it all at once buying every Taco Bell in the U.S. (between you and me, there are better investments). According to Don McNay, who wrote the book Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery, 9/10 winners blow through their money in less than 5 years.
But if you can exercise some self-control – so hard when you could be swimming in a large vault of gold à la Scrooge McDuck! – all you have to do is invest that lump-sum and you could spare yourself a few extraneous tax dollars.