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As for the lottery, it’s been a good year for Uncle Sam so far.
The winners of the Powerball and Mega Millions jackpots – valued at a total of $ 2.9 billion – together paid approximately $ 515 million to the IRS in 2021. And that won’t be the end.
Whether jackpot winners choose the instant, discounted cash option (most do) or a three-decade pension, 24% is withheld for federal taxes. However, since the 37% maximum rate applies to income over $ 523,600 (sole taxpayer) and $ 628,300 (married couples filing together), you end up owing more.
There have been five Powerball jackpot winners so far in 2021 – and the pace of those wins could pick up as a third weekly drawing is added on Mondays starting August 23.
Mega Millions has four winners this year (but the jackpot of $ 55 million won on June 8 remains unclaimed). For all prizes collected, the winners chose the cash option instead of the pension.
For the three Mega Millions jackpots claimed – which ranged from $ 96 million to $ 1 billion – the winners’ cash options totaled $ 1.2 billion. The federal 24% withholding tax totaled $ 288 million, bringing total revenue down to $ 912 million.
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Powerball winners have a total of $ 945.7 million in cash options, with jackpot amounts ranging from $ 23.2 million to $ 731.1 million. After the 24% federal withholding of $ 227 million, the winners were left with $ 718.7 million.
To illustrate, if the winners were unable to reduce their taxable income at all, another 13% – the difference between the 24% withheld and the top tax rate of 37% – would be due to Uncle Sam. Taken together, that would be another $ 278.9 million going into the federal treasury (a total of $ 793.9 million).
Of course, these lottery winnings generally only add a drop in the federal tax bucket. Income taxes paid by individuals are expected to represent approximately $ 1.9 trillion (50%) of the estimated $ 3.8 trillion in government revenue for fiscal 2021.
Local cash registers also benefit from big lottery winnings. State taxes ranging from zero to more than 8% would also be levied depending on where the ticket was purchased.
Like the state withholding tax rate on jackpot winnings, the amount withheld for state taxes can be less than you owe.
There are ways to reduce taxation on your profits, though not many. For 2021, a temporary change in federal regulations will allow charities to reduce their taxable income by making a qualified cash donation worth up to 100% of their adjusted gross income (this limit is expected to be reset to 60% in 2021).
Some lottery winners set up their own charitable foundation or a similar facility, such as a fund advised by donors, and donate part of their profits to it.
The Mega Millions jackpot is $ 179 million ($ 129.5 million cash option) for the Tuesday night drawing. Powerball’s jackpot is $ 211 million (cash option of $ 153.9 million) with the next drawing scheduled for Wednesday night.
Your chance of winning Powerball is 1 in 292 million. For Mega Millions, it’s 1 in 302 million.