The holder of a jackpot-winning lottery ticket isn’t the only one who will get a windfall – the federal and state governments also get a big chunk.
A certified financial planner says taxes aren’t the only thing the winner has to worry about.
Even if you don’t win the Mega Millions jackpot of $1.6 billion, there’s Wednesday’s Powerball drawing that’s north of $620 million. CNBC reported the taxes to the federal government from the Mega Millions jackpot lump sum would be $334.5 million. For the Powerball, it would be $131 million.
Tax Foundation policy analyst Robert Bellafiore said Illinois state government would also take a cut if the winning purchaser is from the state.
“The rate is 4.95 [percent] which puts Illinois right in the middle of the pack [of all 50 states] in terms of how much lottery winnings are taxed,” Bellafiore said.
For Mega Millions, that would be $44.7 million. For Powerball, Illinois would take $17.5 million.
Leonard and Associates CPA Michael Leonard, based in Oak Brook, Illinois, said all taxes combined, the rate would be 47 percent.
“To my firm, I’ve had people win the lottery, not big lotteries – up to five, six million dollars – and the No. 1 thing is [the government] only withholds 24 percent, so you still have to come up with that difference between 24 and 47 [percent],” Leonard said. “And if you don’t come up with that, the IRS will come after you and if you’ve got your winnings in your bank account, the IRS will come after you.”
Leonard said if you win, keep it to yourself and get with a tax professional, because winning the lottery is more than just dollars and cents, it’s about relationships.
“You’re going to have everyone coming out of the woodwork coming for you and you really need to have the advice of professionals to guide you,” Leonard said.
One choice jackpot winners must make outside of whether to give tax-free gifts to friends and families of up to $28,000 for a married couple is whether to take the winnings as a lump sum or as payments over time, like an annuity.
Bellafiore said taking the lump sum may be a better option because you never know what the tax rates will be in the future.
“There’s always the possibility that if you go with the annuity option, you’ll be facing higher taxes in the future than you will be facing with the lump sum right now,” Bellafiore said.
Leonard said it’s up to each person what route to go, but he would personally take a lump sum because he feels he could manage the money better having ultimate control.
And because Illinois doesn’t fully shield the names of winners, Leonard would advise the winner to find an accountant before turning in the ticket.
“And we set up a trust for you and we put the trust’s name on the back of the ticket, then it would be reported that the trust won the lottery and not you individually, so that’s something to think about,” Leonard said.
Gov. Bruce Rauner signed a law in August that allows the winner of a prize of more than $250,000 to make a written request for his or her name and municipality of residence be kept confidential. “The prize winner must submit his or her written request at the time of claiming the prize,” the law states. However, the winner’s name wouldn’t be shielded from requests seeking information under the state’s open records laws.
The odds of winning the Powerball jackpot is 1 in 292 million. The odds of winning the Mega Millions jackpot is 1 in 302 million.
The Tax Foundation, a Washington, D.C.-based think tank, has argued the lottery itself is a tax. After prizes have been awarded and operating costs are covered, the remaining money is transferred to state coffers, the foundation said.
In fiscal 2018, the Illinois Commission on Government Forecasting and Accountability said the Illinois Lottery brought in nearly $3 billion in sales, up 2.9 percent from the year before. The largest contributor in fiscal 2018 was Mega Millions, which rose from $98.2 million to $125 million.
COGFA said $718.8 million of that revenue went to the Common School Fund, a 0.2 percent decline from 2017. For the Capital Projects Fund, the lottery transferred $9.3 million, far below the $145 million COGFA said was transferred in FY 2014.