The current Mega Millions jackpot is standing on $868 Million USD, while the Cash Option for the same Jackpot is $494 Million USD.
The winner of any of Mega Million's jackpot has two options to claim their winnings:
Annuity option:
The Mega Millions annuity is paid out as one immediate payment followed by 29 annual payments. Each payment is 5% bigger than the previous one.
For a typical jackpot of $100 million, the initial payment would be about $1.5 million, and future annual payments would grow to about $6.2 million.
When the jackpot is $200 million, each payment is twice as big. When the jackpot is $50 million, each payment is half as big, etc.
Cash option:
A one-time, lump-sum payment that is equal to all the cash in the Mega Millions jackpot prize pool.
The Question
First, what is the true meaning of the "Cash Option" where it is equal to all the cash in the jackpot? Is that the $2-$3 USD that cost to buy each game ticket? If so, where does the extra ($868 - $494 = ) $374
millions come from in the Annuity Option
?
Second, if the jackpot winner decides to take the Annuity Option, they will simply pay the highest income tax for their status. For example, single person, paid annually would pay $150,689.50 plus 37% of anything in excess over $503,700. So if we generalize for this jackpot, divide the $868 by 29 equal payments, it would be about $29.93 Million a year, and the federal income tax would be $11,038,803?
Would the $494 Million Cash Option be taxed the same way, for a total of $182,744,320 federal income tax?
Lastly, what are the best methods to avoid paying so much tax on lottery winnings/earnings?