“If you’re a wise investor, it makes sense to take it all at once.” Set Up a TrustĪ smart move for lottery winners is to set up a trust. “When deciding upon a lottery payment option it ultimately depends on the unique situation,” says Harry Langenberg, Managing Partner at Optima Tax Relief, who points out winners of big jackpots will be in the highest bracket either way. Also, if you choose the lump sum, you could invest the entire amount and put those lotto winnings to work, which - if your investments go well - could more than compensate for the higher initial lump sum tax rate. However, there is a strong likelihood that taxes will continue to go up over time and negate the tax benefit of annuities.
Similarly, business owners whose profits swing dramatically from one year to the next may benefit from spreading taxable income over multiple years. Those with an income of more than $400,000 have to pay nearly 40 cents on the dollar, which doesn’t even include state taxes. As of 2013, taxpayers with an income between $183,251 and $398,350 pay 33 cents on the dollar to the IRS. Those who choose the lump sum get the cash value in bonds that the lottery would have had to buy in order to pay $10 million over 25 years.įrom a tax perspective, choosing annual payments will keep you in a much lower tax bracket, which will reduce the amount of tax you have to pay. The full prize is only for those who choose the annual payments. If you win a $10 million prize with the New York State Lottery, for instance, you get to choose between $10 million over 26 yearly payments of approximately $250,000 or a lump sum of a little less than $5 million. The first tax decision lottery winners have to make is whether to receive their prize as a lump sum or have it paid out in yearly installments, called an annuity. So how does paying taxes on lotto winnings work? And if you do happen to win the lottery, what is the smartest way to minimize your tax burden? Lump Sum Vs. The same applies even if you win a small prize, win on a game show, or participate in a community raffle. How big a chunk? The taxman’s share could be anything from 40% to 60%, depending on how the winner decides to cash in the prize and if they live in a state that taxes lotto winnings.
The chances of winning a large lottery, such as the Powerball, is one in 175 million and the lucky winner actually has to give the IRS and state tax revenue agencies a big chunk of the prize, every time. Not only is the lottery a tax on people who are bad at math –US lotteries generally only pay out 60% of the money players bet. Who wins after every lotto draw? The taxman does, of course! Optima Tax Relief wants to help you save by providing tips for lowering taxes on your lotto winnings.
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