After exhibiting remarkable determination, a man named Alex walked away with $450,000 after spending 45 days locked in a grocery store alone, courtesy of a cash prize challenge from Jimmy Donaldson, the popular YouTuber known as MrBeast.

Now comes the next big test: Alex’s tax bill from Uncle Sam.

Known for his extravagant contests and jaw-dropping cash prizes, MrBeast has built a reputation for pushing participants to their limits in exchange for life-changing sums of money.

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In this situation, MrBeast offered Alex $10,000 for every day he spent living alone in a fully-stocked grocery store. Alex wasn’t allowed any contact with the outside world. The catch: he had to “earn” his money by trading MrBeast $10,000 worth of items from the store, daily. After 45 days, Alex called it quits so he could see his wife and kids again.

Although winning big money may seem like a dream come true, the reality of keeping those winnings can be far more complex — particularly when it comes to taxes.

Understanding windfall taxation

When someone wins a large sum of money, whether it’s from a game show, lottery prize, or a social media challenge, like those organized by MrBeast, it’s considered a windfall.

In the U.S., windfalls are subject to federal income tax, and often state taxes, too — meaning Alex won’t actually take home the full dollar amount of his winnings. It must be reported to the Internal Revenue Service (IRS) by filing an individual tax return.

The IRS treats prize money as regular income, which means it’s taxed at the same rate as wages or salaries. Here’s a breakdown of how the taxation might work:

Federal taxes: The highest federal tax rate is 37%, which is where you will likely fall if you take the windfall in a lump sum. However, if you spread your winnings out over 30 years, you’ll likely fall into a smaller tax bracket — although this will still vary depending on your other income and the size of your windfall.

Let’s say you’re in the highest tax bracket, 37% of $450,000 owed to the IRS amounts to $166,500. This means that, after federal taxes, Alex would be left with $283,500.

State taxes: In addition to federal taxes, Alex may also owe state income taxes, which varies widely across the country.

In some states, like Florida and Texas, there’s no state income tax, while others, such as California, have rates as high as 13.3%. Assuming an average state tax rate of 6%, Alex would owe an additional $27,000. This would further reduce his take-home amount to $256,500.

Read more: ‘You didn’t want to risk it’: 80-year-old woman from South Carolina is looking for the safest place for her family’s $250,000 savings. Dave Ramsey responds

Reducing your windfall tax liability

While it’s impossible to avoid taxes on windfalls altogether, there are several tactics winners can consider to mitigate their tax liability:

Charitable donations: Donating a portion of the winnings to charity can help reduce taxable income. The IRS allows deductions for charitable contributions, which can lower the overall tax burden. However, the amount deducted must be itemized and the charity must be recognized by the IRS.

Retirement accounts: Contributing to tax-advantaged retirement accounts, such as a 401(k) or IRA, can also reduce taxable income. For instance, in 2024, individuals can contribute up to $22,500 to a 401(k) and up to a maximum of $7,000 for a traditional IRA (or $8,000 for those 50 and older). Contributions could lower the taxable income.

Tax credits: Taking advantage of various tax credits, such as the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC), can also help. These credits directly reduce the tax bill rather than just the taxable income.

Spreading the income: In some cases, it might be possible to spread the income over multiple years, thereby potentially lowering the overall tax rate. This can be a more complex process and may require careful planning and consultation with a tax professional.

Consulting with a tax professional: Given the complexities involved in managing a large financial windfall, consulting with a tax professional is a smart move. A certified public accountant (CPA) or a tax attorney can provide tailored advice and help the winner navigate the tax implications.