Personal Finance

If you win the $340 million Mega Millions jackpot, be prepared for a sizable tax bill

Key Points
  • Your chance of hitting all six numbers is 1 in about 302 million.
  • For Friday night’s drawing, the cash option — which most winners go with — is $230.8 million.
  • Regardless of how winners choose to receive their haul — as an annuity or an immediate reduced lump sum — 24% is withheld for federal taxes, and more would be due at tax time.

The Mega Millions jackpot has climbed higher yet again.

With no one hitting all six numbers on Tuesday, the top prize is an estimated $340 million for Friday night's drawing. And while the odds are stacked against hitting the jackpot — your chance is 1 in about 302 million — at some point, someone will get really, really lucky.

Of course, the advertised amount isn't what the winner would end up with — far from it, actually.

Angela Weiss | AFP | Getty Images

Whether you take the prize as an annuity spread out over three decades or as an immediate, reduced lump sum, 24% is withheld for federal taxes. However, the top marginal tax rate of 37% would mean owing a lot more.

"There is still a sizable tax bill coming, for sure," said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.

"Winners have to plan for any additional amount that will be due next April to the IRS and the state," she said.

How the Mega Millions and Powerball lotteries work
How the Mega Millions and Powerball lotteries work

For Friday night's $340 million drawing, the cash option — which most winners go with — is $230.8 million. The 24% federal tax withholding would reduce that amount by $55.4 million.

Assuming you had no reductions to your taxable income — such as large charitable contributions — another 13%, or $30 million, would be due to the IRS at tax time.

That would be $85.4 million in all going to Uncle Sam, leaving you with a cool $145.4 million.

However, state or local taxes would be on top of that. They range from zero to more than 8%, depending on where the ticket was purchased and where the winner lives. In other words, you could end up paying more than 45% in taxes.

And, like the federal withholding rate on jackpot wins, the amount withheld for state taxes might also be less than what you'll owe.

"They might withhold at, say, 5%, but the rate you pay might be 6%," Walker said.

There are ways to reduce the amount of winnings that gets taxed, although not many. The charitably inclined can lower their taxable income by making a cash donation of up to 60% of their adjusted gross income and carry forward, up to five years, any excess amount.

More from Personal Finance:
What consumers most want in 2020: a debt-free life
Here's when newlyweds will face a 'marriage tax penalty'
How these multimillionaires are avoiding a 40% tax hit

Some lottery winners set up their own charitable foundation or similar option, such as a donor-advised fund, and donate a portion of their windfall to it.

"That would be a way to direct charitable contributions over a period of time but take the deduction [for the current tax year]," Walker said.

Despite forking over a hefty amount to federal and state coffers, the after-tax amount would be life-changing. Experts say jackpot winners should assemble a team of experienced professionals — an attorney, a tax advisor and a financial advisor — to help navigate their sudden wealth.

Meanwhile, the Powerball jackpot is $150 million for Saturday night's drawing, with a cash option of $102.2 million.

Subscribe to CNBC on YouTube.

How much you should save every month to retire with $5 million
How to retire with $5 million