Mega Millions winner: Here's the tax damage

By FeaturesFOXBusiness

Lottery fever grips the nation

FBN's Kristina Partsinevelos on the excitement over the big Mega Millions and Powerball jackpots.

One lucky person in South Carolina finally came forward to claim the record $1.537 billion Mega Millions jackpot on Monday night – and while they may have chosen to remain publicly anonymous, they cannot hide from the Internal Revenue Service (IRS).

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The winner of the second-largest jackpot ever has opted to take the prize in the form of a one-time cash payment instead of an annuity payment – which would have been paid out over 29 years. The lump sum is valued at an estimated $878 million.

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Under the cash option, the jackpot is subject to federal withholding, which is an immediate 24 percent before the winner ever receives a cent, according to K. Eli Akhavan, partner and chair of the Private Client and Wealth Preservation Group at CKR Law.

That will immediately reduce the total by $211.7 million, Akhavan estimates.

The IRS will also likely tax the winnings at the highest federal income bracket, which now sits at 37 percent for individuals with incomes in excess of $500,000. You would owe any difference left over between that tax rate (37 percent) and the federal withholding rate (24 percent) when you file your tax return at the end of the year, Akhavan said, which deducts $114.1 million.

The winnings will also be subject to state tax rates, which vary between 0 and 8.82 percent, depending on the state of residence (7 percent in South Carolina). That reduces the winnings by about $61.4 million.

After taxes are considered, Akhavan – who is not an expert in South Carolina state taxation – estimates the winner would take home about $490.6 million.

Winnings are not subject to the 3.8 percent net investment income tax.

If the winner plans on giving money away, under current law he or she is allowed to give up to $15,000 to as many people as desired without tax consequences.

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The decision to remain anonymous, which is only allowed in certain states, could help the winner avoid additional financial obstacles.

“If your name is publicly announced as a winner, you have the potential of becoming a high-value target for what may be lawsuits based on frivolous claims (consider business creditors, employees, ex-spouses, sexual harassment claims),” Akhavan said.

The winner had until April 19 to claim the prize.