How Much Tax You Will Pay on Your Lottery Winnings

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The $868 million Mega Millions jackpot - next drawing: Friday, October 19 -- has generated a lot of speculation about the best ways to spend that much money. In reality, though, the winner will end up with far less than that. If you bought a ticket for the next drawing and are feeling lucky, read this before you buy a private island or professional sports team.

SEE ALSO: Wealth-Building Secrets of the Millionaire Next Door

$868 million is the value of annuity payments over 30 years. If you opt for an immediate lump-sum cash payment, your payout will be a mere $494.5 million--before taxes. And make no mistake: Your tax bill will be significant and unavoidable.

The top federal tax rate is 37% on 2018 income of more than $500,000 for individuals ($600,000 for married couples filing a joint return). That means you'll pay about $183 million in federal income taxes if you take the lump sum, reducing your spendable winnings to about $311.5 million. (The IRS will automatically take 24% of your winnings, and you'll owe the rest at tax time.)

Your state may want a piece of the pie, too. The biggest hit applies to New York residents, who would have to pony up 8.82% of the jackpot, reducing an Empire State resident's winnings even further to about $268 million. New York City collects an additional 3.876% in local income taxes, whittling a Big Apple resident's take to $249 million.

SEE ALSO: 10 Tax-Friendly States

Residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are off the hook because those states have no income taxes . (Alaska and Nevada don't sell Mega Millions tickets, but residents can buy them out-of-state.) California winners also get a break because the state exempts state lottery winnings from taxes--as long as you buy your ticket in California. Other states withhold taxes at rates ranging from 2.9% to 8.75%. Maryland and Arizona withhold taxes on lottery winnings from non-residents.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Taxes

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