There’s a new $800 million Mega Millions Jackpot winner in Texas. The odds of winning the jackpot are 1 in 302.6 millions (slightly worse than the Powerball’s 1 in 292.2 million).
Now that the winner got picked, they’ll have a decision to make—claim the $800 million in 30 annual annuity payments or take a one-time, lump-sum cash payment of approximately $404.2 million.
Regardless of the choice made, the winner will see a significant reduction in their windfall once taxes are settled. Both the federal government and the state will claim their portions, leaving the winner with less than the initial jackpot.
What’s the tax bill for snagging a $800 million Mega Millions jackpot, and what amount will the winner actually get to enjoy? Read on to find out.
Table of Contents
Federal Taxes on Mega Millions Winnings
Let’s start with some basics on how the federal government taxes Mega Millions winnings, which are considered taxable income.
Federal Tax Rates
First, you should know that the current federal income tax rates run from 10% to 37%. So, depending on the amount of prize money received, the federal tax on lottery winnings can be relatively low or quite high.
If we focus on large lottery prizes (like Tuesday’s $800 million Mega Millions jackpot), you can see how easily the highest federal tax rate comes into play. For the 2024 tax year, the top federal tax rate (37%) kicks in if your taxable income exceeds $609,350 and you’re single. If you’re married and file a joint tax return, then the top tax rate applies to taxable income over $731,200. As a result, lottery prizes above the applicable threshold amount will be taxed at the top federal tax rate.
Note, however, that most tax rates are scheduled to rise in 2026 (unless Congress steps in to keep them at the current rate). The top tax rate will jump to 39.6% at that time. This will impact lottery winners who receive payments over a 30-year period, because they’ll have to pay taxes on payments received after 2025 at the higher rate.
State Tax Rates
State tax rates might also come into play when determining how much tax a lottery winner must pay. While not all states have state income taxes, generally speaking, most states do and the lottery winnings will almost certainly fall into the top tax bracket for the winner’s state.
Rates can vary state-to-state, but most fall in the lower single-digit to lower double digit range, adding an additional amount of tax the lottery winner needs to pay on any winnings.
Because this Mega Millions Jackpot winner lives in Texas, they won’t face a state income tax on their winnings.
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Tax Withholding
It’s also important to realize that, if you win a lottery prize of at least $5,000, 24% of your lottery winnings will be withheld from your payment for taxes and sent to the IRS. This will be applied toward your overall tax bill when you file your federal tax return for the year, so it’s not an additional tax. It’s more like paying part of the tax you’ll ultimately owe in advance.
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For example, with a $1 million prize, $240,000 ($1 million x .24) would be subtracted from you payout immediately (i.e., you would only receive a $760,000 payment). However, when you file your tax return for the year, you would claim a credit for the amount withheld and $240,000 would be subtracted from your overall tax bill.
There might be additional requirements depending on the state or locality you live in as well. The above only applies to federal income tax withholdings.
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Form W-2G
If you win and collect at least $600 from a lottery in 2024, expect a Form W-2G in the mail by January 31, 2025. The form will list your lottery winnings, federal and state taxes withheld, and other information required by the IRS.
The IRS will also receive a copy of the form. So, make sure you report the proper amount when you file your tax return for any year you receive a lottery payment. If you don’t, the IRS will want to know why the amounts on the W-2G and your tax return don’t match … and you really don’t want to draw the IRS’s attention to your return.
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Filing Your Tax Return
When it’s time to file your federal return, you’ll report any lottery winnings as gambling income on Line 8b of Schedule 1 (Form 1040). [The form or line number could change for 2024 tax returns.]
If you have gambling income, that means you can also deduct any gambling losses for the year … but only up to the amount of gambling income reported on your return. You also have to itemize to deduct gambling losses, which means you can’t claim the standard deduction on your return. As a result, depending on your standard deduction amount, you might be better off skipping the gambling loss deduction.
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Federal and State Taxes On the $800 Million Mega Millions Jackpot (Sept. 10, 2024)
Now let’s focus on Tuesday’s Mega Millions drawing for an estimated $800 million jackpot. If you’re the lucky winner in Texas, approximately how much spending money would be left after taxes are paid to the federal government? Let’s do some math.
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Lump-Sum Payout
Most lottery winners opt for a lump-sum amount. If the winner claims the lump-sum, he or she will pay approximately $149.5 million in federal taxes on the lump-sum prize of $404.2 million. About $97.0 million (24%) will be withheld from the payment up front, so the winner will have to pay the rest of the $149.5 million when he or she files a 2024 federal income tax return next year.
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If $149.5 million is subtracted from the $404.2 million lump-sum payment, that leaves about $254.7 million to spend. While that doesn’t sound as nice as $800 million, it’s not too shabby for a $2 investment.
Annuity Option
If the winner selects the annuity option, he or she will receive an initial annuity payment when the prize is claimed, followed by 29 annual payments that increase by 5% each year (i.e., a total of 30 annual payments). Assuming the winner is single and receives the first payment in 2024 (approximately $12.0 million), the total federal income tax bill for the first two payments (2024 and 2025) will be based on the current 37% tax rate—for a total of about $9.0 million in tax for that period. (That assumes a 2.5% increase in the tax bracket thresholds from 2024 to 2025.)
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Once the rate jumps to 39.6% in 2026 (and assuming it isn’t changed again later), the estimated total federal income tax for the final 28 years (2026 to 2053) comes to about $304.6 million. So, for all 30 years, the winner can expect to pay a grand total of about $313.7 million in federal income taxes.
When you subtract that amount from the $800 million in total payments, the winner will be left with approximately $486.3 million at the federal level.
Because the winner lives in Texas, there won’t be any state income tax paid on the jackpot winnings.
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Which Payment Option Is Better?
After seeing the after-tax amounts above, you might be wondering why most people choose to receive their lottery winnings in a lump-sum. After all, isn’t getting $486.3 million better than $254.7 million?
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Not necessarily. The problem with annuity payments is that you have to wait 30 years to get all your money. With the lump-sum option, you get less … but you get it right away. If you invest that money wisely over a 30-year period, you’ll probably end up with far more money in the bank when all is said and done. For example, after 30 years, a $254.7 million investment would turn into approximately $1.1 billion ($1,137.9 million) with a modest 5% rate of return (compounded monthly).
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Young and the Invested Tip: All tax amounts are estimates based on the listed jackpot amounts. They should not be relied on or considered tax advice. If you do win the lottery, consult with a qualified tax professional right away!
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