Large Tax Bills For Mega Millionaires

Each of the three winners of last month’s Mega Millions jackpot of $656 million will likely face daunting tax bills as a result of their winnings. If a winner chooses the cash option, the collection amount will be $128 million before taxes. If a winner chooses to receive an annuity, he or she will receive around $219 million over 26 years.  However, both options end up giving a large portion of the winnings to the IRS instead of to the winner.

Large jackpots are currently taxed at a minimum federal tax rate of 35%, meaning a winner of $128 million will owe the IRS $45 million. If a winner lives in a state that collects a personal income tax on lottery winnings, he or she could owe the IRS around $9 million on a $128 million winning (tax rates on high-income individuals range from 5% to 10%).

The winner could also owe the IRS federal gift tax if he or she shares the wealth with friends or family. After the winner gives away $5.12 million—the current exemption amount—he or she will owe a 35% federal gift tax on any gifts over that amount. Additionally, the IRS and the state could collect additional estate taxes from the winner’s estate after he or she dies.

See Bill Bischoff, Mega Millionaires’ Big Tax Bills, Smart Money, Apr. 11, 2012. 

Special thanks to David S. Luber (Attorney at law, Florida Probate Attorney Wills and Estates Law Firm) for bringing this article to my attention.