For anyone who wins big in Powerball or Mega Millions, those recent federal tax cuts might not translate into a lower bill from Uncle Sam.
Depending on where winners live, they could end up owing more than they would have before the Tax Cuts and Jobs Act took effect this year.
While the legislation reduced the top marginal income tax rate to 37 percent from 39.6 percent, it also eliminated most tax deductions and put a $10,000 limit on what you can deduct for state and local taxes (called SALT) that you paid during the year.
"There's a wide range in state tax rates, which means a winner could owe more than they would have with no SALT limit," said Cari Weston, a CPA and director of tax practice and ethics at the American Institute of CPAs.
Of course, they'd also be an awful lot richer.
For Mega Millions, the jackpot has reached $305 million for the game's next drawing, which takes place Friday night. Powerball isn't far behind: The top prize has climbed to $281 million for Saturday night's drawing.
To illustrate how the new tax law affects winners: Say someone wins the $305 million Mega Millions jackpot and chooses the lump sum option of $181.4 million instead of spreading their winnings over several decades. (Most jackpot winners take the upfront cash amount.)
Top 10 lottery jackpots
| Rank | Amount | Date won | Game | Winner locations |
|---|---|---|---|---|
| 1 | $1.586 billion | Jan. 13, 2016 | Powerball | CA-FL-TN |
| 2 | $1.54 billion | Oct. 23, 2018 | Mega Millions | SC |
| 3 | $758.7 million | Aug. 23, 2017 | Powerball | MA |
| 4 | $687.8 million | Oct. 27, 2018 | Powerball | IA-NY |
| 5 | $656 million | Mar. 30, 2012 | Mega Millions | KS-IL-MD |
| 6 | $648 million | Dec. 17, 2013 | Mega Millions | CA-GA |
| 7 | $590.5 million | 18-May-13 | Powerball | FL |
| 8 | $587.5 million | Nov. 28, 2012 | Powerball | AZ-MO |
| 9 | $564.1 million | Feb. 11, 2015 | Powerball | NC-PR-TX |
| 10 | $559.7 million | Jan. 6, 2018 | Powerball | NH |
That windfall would be subject to the new top rate of 37 percent, or $67.1 million. The previous top rate of 39.6 percent would have meant forking over $71.8 million, or $4.7 million more.
However, due to the new $10,000 SALT deduction limit, the jackpot winner no longer would get to write off any amount above that paid in state and local taxes.
For example, in New York, the top income tax rate is 8.82 percent, among the highest in the nation. Applying that to the Mega Millions lump sum option of $181.4 million would result in roughly $16 million going to state coffers.
Say the winner also lived in New York City. Another 3.88 percent, or about $7 million, would go to that jurisdiction. That's a total of $23 million going to state and local taxes.
If the SALT deduction were still unlimited as it was pre-2018, the winner would see a tax savings of about $8.5 million by deducting that $23 million on their federal return.
Now, that savings is gone. Which means the $4.7 million reduction from a lower tax rate would be wiped out — and you'd pay $3.8 million more in taxes this year.
Meanwhile, if you're lucky enough to win in one of a handful of states that either doesn't tax lottery wins or has no income tax, you'll come out ahead. And the lower the state tax rate, the better off you'd end up.
Additionally, if you're charitably inclined, you could lower your taxable income by making a cash donation of up to 60 percent (up from 50 percent pre-2018) of your adjusted gross income and carry forward, up to five years, any excess amount. Some lottery winners set up their own charitable foundation and donate a portion of their windfall to it.
Also, some of the money you'll pay in federal taxes will never reach you to begin with: The lottery is required to withhold 24 percent of your winnings.
"Then you need to have cash for the difference between what was withheld and the final tax bill," Weston said.
State tax withholding rates depend on where you bought the ticket. Be aware that winning in a no-tax state won't get you off the hook if you live in a state where lottery winnings are taxed.
However, everyone's situation is different, and big lottery winners should consult with a tax advisor, along with an attorney and financial advisor.
Of course, most people won't need to worry about how a jackpot is taxed. Your chance of winning Mega Millions is 1 in 302.6 million. For Powerball, it's 1 in 292 million. The chance of hitting both? One in at least 88 quadrillion. That's 88 followed by 15 zeros.
You have a much better chance of being struck by lightning in your lifetime: 1 in 14,600, according to the National Weather Service.
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