As of today, no one has successfully picked the right numbers to win the current Mega Millions jackpot. Based on current projections, it is scheduled to reach $1.35 billion by the drawing on Friday, Jan. 13, 2023. This is the second-largest Mega Millions drawing and in the top five largest jackpots ever in the United States.
Travie McCoy (featuring Bruno Mars) released the song “Billionaire” in 2010 in which he discusses wishing to become a billionaire and all the things he would do with the money. In one particular line, he muses that if he became a billionaire, he would be in a “whole new tax bracket.” If you were to win the Mega Millions, whether you took the lump sum of approximately $708 million or took the annual annuity option, you would likely enter into a whole new tax bracket. As you dream of winning the lottery and becoming a billionaire, here are some important tax considerations.
Don’t Spend it All in One Place
While buying a bigger house, splurging on a luxury car or going on an exquisite vacation may be in the cards after winning the lottery, don’t spend that lottery check all at once. Lottery winnings are subject to federal income tax and federal income tax withholding. Under Internal Revenue Service (IRS) guidelines, winnings of greater than $5,000 are subject to a mandatory 24% income tax withholding. The various state lottery commissions are usually responsible for the withholding of this mandatory tax from any winnings.
However, while there is a mandatory 24% income tax withholding requirement for federal taxes, the top federal tax bracket is actually 37% beginning at $578,125 ($693,750 for married, filing jointly). Therefore, it is likely that you would be subject to an additional 13% tax rate on amounts greater than $578,125 ($693,750 for married, filing jointly) for your billion-dollar winnings. Please note that amounts less than $578,125 are still subject to tax but are taxed at a lower tax rate. Thus, if you spent all the money, Uncle Sam would still likely seek to obtain his portion of your tax winnings. Failure to pay the remaining tax owed could subject you to civil liability including penalties and interest.
Did You Pay Your State and/or Your Local Income Taxes?
In addition to federal taxes, lottery winners are usually subject to state taxes on their winnings and may also be subject to local income taxes. Under Ohio law, lottery winnings are subject to state income tax. Ohio uses a bracketed tax system; therefore, Ohio residents would owe income tax of $3,123.05 for amounts less than $110,650 and at a tax rate of 3.990% for all amounts greater than $110,650. In order to ensure compliance with tax laws, the state lottery commission is required to withhold an automatic four (4%) percent of the lottery winnings and remit such amounts to the state on the taxpayer’s behalf. Therefore, taxpayers would reconcile their withholdings against their actual tax liability when they filed their 2023 tax return.
Be Careful About Giving It All Away at Once
A lot of people choose to take large winnings and be quite generous in their gifting to family, friends and organizations. In fact, in the song Billionaire, Travie McCoy talks about giving away “a few Mercedes” and turning into Santa Clause with his givings. However, the gifting of your winnings to others can have unintended tax consequences. Under current IRS guidance, individuals can give up to $17,000 ($34,000 married) as a part of their annual gift exemption without impacting their lifetime exemption. Therefore, you can provide $17,000 to others without such a gift being taxable. In addition, individuals currently have a lifetime exemption of $12.920 million ($25.84 million married) without being subject to the gift tax. There are various exemptions to such giving including charitable contribution considerations, so consulting with a tax professional before making any decisions is important. Therefore, as you contemplate giving away your new winnings to friends, family or strangers on the street, make sure you understand the full implications of such a gift.
Becoming a billionaire overnight can be a life-changing situation. However, the receipt of such a large amount of money can have some unintended consequences. Therefore, you must take into consideration both the legal and tax consequences of winning the lottery. For support with tax matters including lottery winnings, please contact a member of our Tax Practice Group, including Demetrius Robinson (614.427.5749; DJR@kjk.com).