‘I instantly started crying’: This Illinois woman just won $1 million on a lottery ticket she stashed in her purse and ‘forgot all about’ — what would you do with a million-dollar windfall?

Why $1 million isn’t really $1 million

Not to spoil the party, but let’s begin with the tax implications. According to the IRS, lottery winnings of $5,000 or more are subject to a 24% withholding rate off the top for federal income tax. There may also be a local state tax to consider, which will vary depending on where you live.

In Illinois, lottery winnings of $1,000 or more must have Illinois Income Tax withheld — which would be 4.95% of the prize money. And when it comes time to file your tax return, lottery winnings are considered ordinary income and are taxed the same as wages or a salary.

If our Illinois winner takes her $1 million in a lump sum, she’ll hop into the top marginal federal tax bracket. For 2024, that’s 37% for individual taxpayers with incomes greater than $609,350 or $731,200 for married couples filing jointly. But that rate will only apply to income over $609,350. Spreading out your winnings and opting for annual payments over a certain period of time could help you stay below the top tax rate each year.

If you’re a regular lottery player, you can also claim losses against winnings so long as you provide proper proof.

But in the end, you’re not taking home as much as you may think. That’s why it’s important to consider how you can make the most of the winnings you’re left with.

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How to lower taxes on your windfall

These four strategies can help lessen the government’s share of your take:

• Opt for yearly payments. By taking ten annual disbursements of $100,000, the Lucky Lotto winner could fall back a few marginal tax brackets, depending how much income they make from their day job.

• Donate to charity. If you’d planned to do this anyway, recognize that charitable gifts are often tax-deductible. The IRS states that individuals may deduct qualified contributions of up to 100% of their adjusted gross income.

• Consult a top-tier CTA. While fees for premier tax advisors can run around $500 or more, it’s worth every penny if they can find deductions that save you tens of thousands of dollars.

• Invest it back into a sole proprietorship. Putting the winnings toward capital improvements or equipment to build out your existing Schedule C business may make much of that portion tax-free. Always consult a tax or financial professional when in doubt, and should you want to show off your winning ticket, so much the better.