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How Much Tax You Will Pay on Your Lottery Winnings

Sandra Block, Senior Editor, Kiplinger's Personal Finance

The record-breaking $1.6 billion Mega Millions jackpot 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

$1.6 billion 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 $904.9 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 $335 million in federal income taxes if you take the lump sum, reducing your spendable winnings to around $570 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 $490 million. New York City collects an additional 3.876% in local income taxes, whittling a Big Apple resident's take to roughly $455 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.

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Copyright 2018 The Kiplinger Washington Editors