If I live in a state that taxes prizes, but bought my ticket in a state with no tax on prizes, do I still need to pay state tax?
Yes, you do. Think of lottery prizes as regular earned income from a job. Just because you may work in a different state, that doesn’t permit you to get away with not paying state income tax in your state of residence. The lottery works the same way.
Whether it’s income from a job or income from gambling, the state where the money is won will tax the prize first at their out-of-state tax rate (assuming the state taxes lottery winnings). If your state of residence has the same or lower tax rate, then you won’t owe anything else. But if your state has a higher rate, you will get a credit for what you paid in the other state, and pay the difference to your state.
If the other state has no tax, you just pay the entire tax bill to your state.
The net result is that you end up paying whichever tax rate is higher between your state of residence and the state where you purchased the ticket. Of course, the tax law is quite complex and it’s possible that some condition or arrangement exists between the two states and a good tax attorney and/or accountant could discover a tax-saving loophole. That’s why we always recommend that major prize winners do not make any major decisions before first hiring a good legal and financial team.
One other option to consider, depending on how much in taxes you’re looking to save: the residency requirements as they relate to prize claims, state taxes, and income reporting. Since you aren’t responsible for paying taxes until you claim the prize, perhaps there is time to establish residency in the state where you purchased the ticket before the prize claim period expires. However, that is something you would definitely need to explore with an attorney before taking any action to assess the feasibility. You would also need to decide if it would be worth the risk of that important little piece of paper not getting lost, damaged, or destroyed in the time you spend arranging everything.
Why is the cash option always a different percentage of the annuity from draw to draw?
If you’re calculating what percentage the cash value is of the annuity, then you’re looking at it backwards. The cash value is the starting point, as it is a direct percentage of ticket sales. Then the annuity amount is calculated from that, based on prevailing interest rates. Since the interest rates are constantly changing, the annuity amount calculated on one day will be a different number than if it is calculated the next day. So when a drawing occurs and the lottery has to estimate the next annuity jackpot, they first estimate the number of tickets that will be sold for the next drawing, which determines what the cash value estimate is (because a fixed percentage of each ticket sold goes toward prizes). Then they finally calculate what the annuity will be based on the current interest rates.
What is the Megaplier?
The Megaplier is an option that is currently offered in all states that sell Mega Millions tickets except California. For an extra $1.00 per ticket you can increase your non-jackpot prize winnings by 2, 3, 4, or 5 times.
The Megaplier is not available in California because of state law that requires all lottery prizes to be paid out on a pari-mutuel basis.
The Megaplier multiplier number is chosen at random by computerized drawing in Texas at around the same time the Mega Millions numbers are drawn in Georgia. The Megaplier was invented by the Texas Lottery as an add-on available only in that state, but was later available in all of the Mega Millions states except California starting in 2010. The Megaplier continues to be drawn in Texas.
A player must choose the Megaplier option when they buy their Mega Millions ticket, and then the ticket must match one of the 9 Ways to Win (except the jackpot) before the multiplier takes effect. Megaplier costs an extra $1 per play. See How to Play Mega Millions for more information.
Why is the cash option different than the advertised jackpot?
The Mega Millions jackpot is an estimated 29-year annuity value, with a total 30 payments (the first payment happens right away, followed by 29 annual payments). When players choose
the annuity option for their prize, the state lottery pays the prize out over 29 years (30 payments) by
buying U.S. Government Treasury Securities, which earn interest and mature annually over
the 29 years. That annual return is the amount the winners receive each year for the
29 year period. With the cash option, the state lottery will take the amount of
money that would have been invested and will pay it directly to the winner in one
payment. Both payment options have federal and applicable state taxes deducted
from them, although with an annuity option you pay taxes gradually on each annual payout, not all at once like with the cash option.