Odds to win the Mega Millions jackpot improve next week, but come with these tax issues

The odds of winning an even bigger Mega Millions jackpot improve next week, but the tax consequences will remain just as complicated.

On April 5, the price of a Mega Millions ticket is increasing to $5 from $2, only the game’s second price adjustment since the first ticket was sold more than 20 years ago. Everyone’s odds of winning a prize will improve (to 1:23 from 1:24 overall and to 1:290,472,336 from 1:302,575,350 for the jackpot) and prizes will be larger, Mega Millions said.

Non-jackpot prizes will be 2X, 3X, 4X, 5X and now 10X larger than they are today, and jackpots will start at $50 million instead of $20 million, it said. The first drawing for the new Mega Millions is April 8.

While Mega Millions may be “new and improved,” the tax situation isn’t, experts said. Since players have better odds of winning, they should know how winning could affect their finances. Here’s a rundown.

No standard among states

States vary in how they treat lottery winnings so you must know the rules where you live and where you bought the winning ticket.

For example, “California excludes lottery winnings, (but) the catch is that it must be sold from a California lottery retailer,” said Richard Pon, a certified public accountant in San Francisco.

That means a California resident buying a Mega Millions ticket from another state will have to pay California tax since it wasn’t sold by a California lottery retailer, he said.

“This is where a tax professional really comes in handy,” Mark Steber, chief tax officer at Jackson Hewitt, said. “State taxes can be very tricky.”

Be prepared to pay federal tax on big wins

Lottery agencies generally withhold 24% of all winnings over $5,000 for taxes, but the highest federal tax bracket is 37%. Lottery winnings are taxed as ordinary income.

Even if someone wins and chooses to receive regular annuity payments over 30 years and “sells the future income stream to another party, the sale is not considered capital gains eligible for lower tax rates,” Pon said.

“So don’t spend all your money at once since you likely will owe tax on the jackpot,” he said.

Lump sum payment vs annuity and taxes

More than 90% of lottery winners choose the lump sum over 30 annuity payments.

Taxes will be higher if you receive a lump sum. Having income over 30 years will let you have income also taxed at the six lower tax brackets each year instead of primarily having your Jackpot taxed at 37% in one year, Pon said. There are seven tax brackets in 2025.

Installments also potentially give you time to move to a state with no income tax in a future year thereby reducing your state tax to zero, he said.

“However, the true economics is that having your winnings now in a lump sum -- even if it’s about 50% lower than the 30-year installment option -- can increase your wealth as you can invest the proceeds immediately,” Pon said.

But if the Tax Cuts and Jobs Act expires at the end of the year, a lump sum could make sense. Six of the seven tax brackets will increase next year if the Act isn’t extended. The highest bracket would rise to 39.6% from 37% this year.

A lump sum would also protect your winnings from inflation, which would reduce the value of future payments, he said.

Other tax tidbits that could cut your bill

Thanks to the Tax Cuts and Jobs Act, jackpot winners in 2025 could take advantage of the high lifetime estate and gift tax exemption and give away $13.99 million per person tax free.

Unless the Tax Cuts and Jobs Act is extended, jackpot winners in 2026 and beyond will only be able to give away about half that amount tax free.

Separately, winners this year can gift to as many people as they want $19,000, without eating into their lifetime estate and gift tax exemption.

If you have any gambling losses and itemize your taxes, you can technically apply that against your winnings to lower the taxable amount of your jackpot, Pon said.

However, he warns “upon audit many people are not allowed this gambling loss deduction as it’s hard to prove gambling losses without receipts. Even having losing tickets is not proof of payment as the IRS can argue you found the losing tickets.”

Winning a huge jackpot is exciting and can change the course of someone's life, but it can also be overwhelming and complicated to handle financially. Financial professionals suggest winners assemble a an entire financial team before telling anyone to hash out a plan.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.