It’s one of those $1.58 billion problems that you actually wish you had.
One lucky player in Florida matched all six numbers in Tuesday night’s drawing to win the Mega Millions jackpot, ending a stretch of lottery futility that had stretched for nearly four months.
If you had won, you might wonder what you would have done: “Take the lump sum payment or the long-term payout?”
Yeah, it’s a problem we all wish we could have soon. Oh, there are other concerns, too, so while you still have a chance to worry about winning, let’s get to them:
What’s one of the biggest mistakes you can make when you win Mega Millions?
Maybe, like, bragging? Letting too many “friends” know your good luck?
The historic Mega Millions jackpot for Tuesday’s drawing was estimated at $1.58 billion — or $783.3 million for those who opt for a lump-sum cash option. Jackpots are impossible to predict in advance to the penny because it’s unknown how the latest frenzy could build.
The Mega Millions tickets cost $2 per play.
Mega Millions has awarded four jackpots exceeding $1 billion — one in 2018, 2021, 2022 and one in January 2023.
In 2021, a small Oakland County, Michigan, group called “Wolverine FLL Lottery Club” hit the $1.05 billion jackpot. The group opted for the cash option or lump sum of $776.6 million before taxes, according to Jake Harris, player relations manager for the Michigan Lottery.
One person served as the group’s representative and spokesperson — Kurt D. Panouses, a Florida estate planning attorney with a lottery practice, who Harris said was a member of that club. The identities of the other members of the group were not disclosed.
If you won the Mega Millions jackpot in Michigan, Harris said, you’re required to go public for transparency. If you won as part of a group, he said, the Michigan Lottery generally works with one member of the club to serve as a representative and spokesperson to fulfill the media obligations for the group.
The 2021 winning ticket in Michigan was bought at a Kroger store in Novi. The winners had a choice between accepting the prize as a graduated annuity or as a lump sum.
You win a billion — or take home hundreds of millions at once — and the word will no doubt spread.
“Be careful who you tell,” advises Holli Armstrong, spokeswoman for the South Carolina Education Lottery. “You may not want to post it on social media. It’s not a good idea.”
Typically, lottery experts suggest you sign the back of your ticket if you’ve got a winner, put the ticket in a super safe place and be extremely careful who you tell. If your husband or wife has a big mouth, maybe don’t tell them too early in the process. Big lottery winners are often encouraged to take their time to line up a team of legal, financial and tax advisers before claiming a major prize.
The record Mega Millions jackpot was $1.537 billion, won in South Carolina in 2018. The winner — who wasn’t part of a lottery club or group — won the whole thing and decided to take the lump sum of $877 million, Armstrong said. One person — all that money.
The winner remained anonymous, Armstrong said, as is allowed in South Carolina, and only described as a “South Carolinian.”
That winner, oddly enough, was pretty polite and reportedly allowed a fellow customer at the KC Mart convenience store in Simpsonville, South Carolina, to jump ahead in line to buy a ticket just before the winning ticket was sold.
“A simple act of kindness led to an amazing outcome,” the lottery commission said in a statement when announcing that a winner had come forward in March 2019, a few months after the Oct. 23, 2018 drawing.
No, the winner did not get to sign the back of a big check and drive it over to the bank. Instead, Armstrong said, the money was sent via wire transfer to the winner’s account.
Out of eight Mega Millions jackpot winners in South Carolina since 2002, all have taken the lump sum cash option, Armstrong said.
Should you take the lottery lump sum or extend payouts?
Personally, if I ever played the lottery and I do not, my first instinct would be to take all the money and run. But that’s not usually the best advice for a long list of reasons. I know it and you probably know it, too.
“From a tax standpoint, it usually makes sense to spread out your lottery receipts and avoid taking the lump sum payout,” said James Hines, the Richard A. Musgrave Collegiate Professor of Economics at the University of Michigan in Ann Arbor.
But if you think, as some do, he said, that tax rates on the very rich — and yes, you’d be very rich — will skyrocket in the future, you might consider the lump sum.
Lottery winnings will be taxed at the federal level and potentially at the state level.
A Michigan winner might view the state’s lower income tax rate in 2023 as an incentive to take a lump sum this year, said Lisa Pohl, principal and director for state and local tax for Rehmann in Grand Rapids. The state income tax rate for 2023 in Michigan has dropped to 4.05% but the state’s income tax rate will return to 4.25% in 2024.
A Michigan winner might view the state’s lower income tax rate in 2023 as an incentive to take a lump sum this year, said Lisa Pohl, principal and director for state and local tax for Rehmann in Grand Rapids. The state income tax rate for 2023 in Michigan has dropped to 4.05% but the state’s income tax rate will return to 4.25% in 2024.
Lottery winnings are considered “ordinary taxable income,” said Mark Steber, chief tax information officer for Jackson Hewitt Tax Services. The highest federal tax rate is 37% and that’s where big winners end up.
More federal taxes will be owed, Steber said, once the taxpayer files their 2023 federal income taxes based on their total taxable income.
On an estimated lump sum of $757.2 million before taxes, (and before the final winnings were announced late Tuesday) the federal withholding is estimated to be $181.7 million if 24% is withheld. That would bring the payout to around $575 million.
The lump sum payout would drop further if state income taxes are withheld, depending on the state.
If you’re spreading out the Mega Millions payments in the latest jackpot for 30 years, Steber said, you’d likely get $23.3 million in the first year before taxes. Then, you’d get payments each year for the next 29 years, Steber said.
The total payment each year increases by about 5%, with the last payment in the final year being about $96 million before taxes, according to an Omni Calculator online called “Mega Millions Payout Calculator.”
Total payouts before taxes after 30 years will equal the total amount won.
Make no mistake, you’re still paying taxes on those payments over 30 years. For example, federal taxes on the first year’s $23.3 million would be nearly $8.6 million alone that year.
If you died early, Steber said, you could include the remaining winnings in your will.
Why could a lump sum work?
The winner, of course, has more control over more money by taking a lump sum.
“By taking the lump sum option, you get the money today, you pay the taxes on it today and you control what you do with the funds you receive,” said Henry Grzes, lead manager for Tax Practice & Ethics with the American Institute of CPAs.
You’d know you’d pay a 37% top tax rate at the federal level now. The top federal tax rate over the last 30 years, Grzes said, has fluctuated.
For example, the top bracket hit 39.6% in 1990s. The Economic Growth and Tax Relief and Reconciliation Act of 2001 then dropped the highest income tax rate to 35% from 2003 to 2010. And then the American Taxpayer Relief Act of 2012 increased the highest income tax rate to 39.6% again.
The highest income tax rate was lowered to 37% for tax years beginning in 2018.
If you take the annuity, Grzes said, you get the money over 30 years in equal installments, plus a 5% annual increase each year and you’d pay taxes over those 30 years, again, based on the current tax rate each year.
Some people, Grzes said, might believe they could get a better rate of return than 5% a year if they took that lump sum now and invested it, instead of opting for payouts for 30 years.
Maybe they can do better. But maybe they can’t.
“From a financial management perspective,” U-M’s Hines said, “the good feature of taking a lump sum payout is that you have access to the money immediately. And, of course, the bad feature is that you get access to the money immediately.”
One big problem that lottery winners can face is that everybody finds out that you’re a lottery winner.
Family, friends, people who pretend to be friends, Hines said, all can insist that you share this newfound wealth. You can end up picking up the tab for everything.
And many have sure-fire ideas for making even more money — as if you need to do that if you win $1 billion or more.
The pressure from family and friends can be another good reason not to take the lump sum payout, Hines said.
“Annuitizing the payments will not address all of the issues, but at least it affords the winner the chance to learn over time who to trust and how to manage the newfound affluence.”
How much resolve will you have to simply learn key phrases? Maybe phrases like: “I’m good, thank you,” “No, I’m not interested,” and “Never in my wildest dreams would I give you that money.”
You cannot simply collect the Mega Millions jackpot and keep spending a billion dollars as if you could never run out of money. You could — and you would if you listen to too many people.
“The biggest mistake you can make is to take the lump sum,” Hines said, “and then do with the money what those around you want you to do.”
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor.
