I won the lottery. Now what do I do?
The largest winnings in U.S. history means a boatload in taxes to Uncle Sam.
I've got jackpot fever. Me and about 200 million other people.
So, I bought a few lottery tickets for Tuesday night's drawing. Together, the Mega Millions and the Powerball jackpot total more than $2.2 billion, the largest in U.S. history.
But how do I handle the winnings? Lump sum or annuity? And once I win — as I surely will — how much should I split with my coworkers, my husband, and our cats?
And here's the rub: How much will I pay in taxes?
Let's just start with the $1.6 billion Mega Millions jackpot.
Professional tax accountants and investors are divided on taking the annuity. But, by taking it, I would pull down a cool $53 million a year for 30 years before taxes.
The cash lump sum? While advertised as a $1.6 billion jackpot, the next lottery player with all six winning Mega Millions numbers will be awarded about $913 million if choosing to take it all at once, according to lottery website USA Mega.
All gambling winnings are taxable, whether we roll the dice, play cards, or bet on the horses. Hitting the lottery would vault the winner into the highest tax bracket, and although federal taxes will always apply, state and local taxes vary from location to location.
For a resident of Pennsylvania, the state lottery tax totals just over 3 percent, according to the Tax Foundation, an independent nonprofit group based in Washington. New Jersey taxes lottery winnings at 8 percent — while Delaware has no lottery tax.
Most financial advisers say to choose the lump sum. But the winner would lose more than 40 percent by taking the money early and another 40 percent or more of the net amount in federal taxes, said David L. Zalles, a Blue Bell certified public accountant.
"The federal taxes would probably be 40 percent," Zalles estimated. "Still, I'd be happy to sign them as a client."
Installment payouts are smarter than a lump sum. And unless you're a professional investor, it's way too much money for one person to handle alone, said Brian Christian, a CPA based in Park City, Utah, and a group lottery winner in the 1980s.
Large prize winners should always take installments, said Christian.
"Before claiming their prizes, I recommend that they have some in-depth conversations with a qualified attorney, CPA, and investment adviser," he noted, and it's best if everyone is in the same room — and are not family.
What's the first thing I should do after I win?
"Sign the ticket," advised Gordon Medenica, lead director of the Mega Millions Group and director of Maryland Lottery and Gaming, when he spoke to Today.
Most times, winners are groups of people or families (which can be an interesting dynamic in trying to prove that there was an actual partnership before the ticket was purchased).
There are also my coworkers to consider. It makes good financial sense to split the winnings, right?
By splitting winnings between colleagues and family members for 30 years, each person can itemize deductions annually and take advantage of graduated tax rates on the first $500,000 (if single) or $600,000 (filing jointly).
Here is the IRS form used to allocate winnings among multiple parties.
May the odds be ever in your favor.