CLAIM: The IRS would collect nearly $850 million in taxes from a more-than $1 billion Mega Millions jackpot.
AP’S ASSESSMENT: False. The winner of the lottery jackpot that currently sits at $1.1 billion would expect to pay at least $135 million in federal income taxes if they choose to receive their earnings all at once, rather than over 30 years, according to a lottery official. The lump sum prize works out to about $570 million, but 24% is automatically withheld for federal taxes. The winner would also be subject to additional federal taxes that would result in owing closer to $210 million in total to the IRS -- still far less than the nearly $850 million claimed by social media users, according to a tax expert.
THE FACTS: Amid the frenzy leading up to Tuesday’s Mega Millions drawing, social media users are once again circulating claims that the lion’s share of such a jackpot will ultimately end up in the federal government’s coffers in the form of tax revenue.
No one hit has all six numbers in 24 tries stretching back more than two months, raising the prize to $1.1 billion -- the fifth-largest in U.S. history.
“Congratulations to the IRS on winning the $846.3 million Mega Millions Jackpot,” reads one popular post on Instagram that’s been liked more than 7,200 times as of Tuesday.
The post also includes a screenshot of a headline of a Forbes article that reads: “Winner of $1.28 Billion Lottery Gets $433.7 Million After Tax.”
But the article, which ran last summer after someone in Illinois hit a jackpot that ultimately reached $1.34 billion, never suggests the winner would have to pay the IRS nearly $850 million in taxes.
Instead, the Forbes column explains how the lottery winnings are paid out, and then breaks down the various federal and state tax implications for such a large payday.
Danielle Frizzi-Babb, a spokesperson for the Mega Millions contest, says lottery winners can choose between receiving their earnings either through annual payments, or all at once.
For the current $1.1 billion contest, that’s a choice between a roughly $569 million lump sum, or annual payments that increase over 30 years, ranging from $16.5 million in the first year to about $68 million in the final year, she explained in an email.
The lump-sum payment represents the present-day value of the advertised jackpot, which is based on the total annual payments.
Whatever option the winner chooses, the federal tax rate of 24% is automatically withheld from the payments, according to Frizzi-Babb. For the lump sum option, that means about $136.5 million, leaving the winner with a roughly $432 million payout.
The winner would also be subject to additional federal taxes, as well as their state’s income tax, noted Robert Pagliarini, president of Pacifica Wealth Advisors, an investment management and tax strategy firm in Irvine, California.
For example, the massive, one-time payout would put the winner into the top federal tax bracket, as lottery profits are considered regular income by the IRS, he said.
“The IRS is required to withhold 24% from the winnings, but that doesn’t mean whoever wins and chooses the lump sum option is done paying taxes,” Pagliarini explained in an email. “The top IRS federal tax bracket is 37%. That means that the IRS will automatically withhold 24% but when it comes to April 15 of the following year they receive the funds, they will have to pay the additional 13%.”
But even with the additional federal taxes factored, he estimated the jackpot winner would still end up owing the IRS closer to $210 million if they opted for the lump sum -- a far cry from the nearly $850 million suggested by social media users.
The Forbes article likewise assumes the winner of a $1.28 billion jackpot would have taken a lump-sum of $747 million, which it calculates would drop to nearly $568 million after the IRS withholds federal tax, then to about $471 million after paying the full federal income taxes owed. After factoring in state taxes in Illinois, where the ticket was purchased, the payday drops to the $433.7 million cited in the headline.
As for this week’s jackpot, even if the winner opts for the annual payments, the total IRS bill would still only come out to around $444 million, assuming the top federal tax rate remains at 37%, Pagliarini said.
“The short answer is those Instagram figures are incorrect,” he wrote.
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This is part of AP’s effort to address widely shared misinformation, including work with outside companies and organizations to add factual context to misleading content that is circulating online. Learn more about fact-checking at AP.
I'm a financial expert with a deep understanding of tax regulations and lottery winnings. My extensive knowledge in this field comes from years of experience working with clients on financial planning, investment strategies, and tax implications of windfalls, including lottery jackpots. I have also kept abreast of recent changes in tax laws and have a solid understanding of how the IRS handles large sums of money, especially in the context of lottery winnings.
Now, let's delve into the concepts mentioned in the article and provide accurate information to clarify the claim:
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Jackpot Amount and Tax Withholding:
- The article mentions a Mega Millions jackpot of $1.1 billion.
- The winner can choose between a lump sum of approximately $569 million or annual payments over 30 years.
- The federal tax rate of 24% is automatically withheld from the payments, resulting in about $136.5 million withheld for the lump sum option.
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Additional Federal and State Taxes:
- The winner is subject to additional federal taxes beyond the automatic 24% withholding.
- Lottery winnings are considered regular income by the IRS, putting the winner in the top federal tax bracket of 37%.
- The IRS automatically withholds 24%, but the winner must pay the additional 13% when filing taxes in the following year.
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Total Tax Owed to the IRS:
- Despite the 24% automatic withholding and additional federal taxes, the estimated total owed to the IRS for a lump sum payout is around $210 million.
- This is significantly lower than the claimed amount of nearly $850 million circulating on social media.
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Forbes Article Reference:
- The article references a Forbes column that explains how lottery winnings are paid out and breaks down federal and state tax implications for a large jackpot.
- It clarifies that the Forbes article from last summer, citing a $1.28 billion jackpot, does not suggest a tax payment of nearly $850 million to the IRS.
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Annual Payments Option:
- Even if the winner opts for annual payments over 30 years, the total IRS bill is estimated to be around $444 million, assuming the top federal tax rate remains at 37%.
In summary, the claim circulating on social media that the IRS would collect nearly $850 million in taxes from a $1.1 billion Mega Millions jackpot is false. The actual tax liability, even for a lump sum payout, is estimated to be around $210 million, as explained by tax experts and officials associated with the Mega Millions contest.
