By Simon Volkov
Lottery taxes can amount to almost half of jackpot winnings, so it’s important to work with accountants and financial planners to reduce tax burdens. Professionals can advise of estate planning and investment strategies and help expand winnings through smart planning.
Lottery taxes are assessed on cash and non-cash prizes that are won through legal gaming. This includes jackpot lottery winnings from national games such as Mega Millions and Powerball and cash or prizes obtained from sweepstakes, raffles, scratch-off tickets, and casinos.
Most people that win millions of dollars all at once don’t possess money management skills that allow them to capitalize on tax savings and investment opportunities. It’s not uncommon for winners to squander away all their newfound wealth within a few years.
Another problem lottery winners’ encounter is not paying required taxes on time. Anytime a person wins $600 or more in cash or prizes, they must report the income on personal tax returns.
One thing to keep in mind is the Internal Revenue Service allows taxpayers to deduct gambling loses as long as appropriate documentation is provided. Taxpayers that buy raffle and lottery tickets need to retain receipts or non-winning tickets, along with accounting records of winnings and losses.
How much is taxed on lottery winnings depends on the amount won and how payments are accepted. People that win millions can elect to accept lump sum cash or annuity payments that provide annual installments. Winners that accept lump sum cash are required to remit lottery taxes in full, while those that accept annuity payments pay taxes with each installment.
Mega lottery jackpot winners can engage in tax savings strategies to reduce the amount owed. One of the most common methods is accepting annuity payments that provide annual installments for 20 years.
Overall, annuity payments tend to supply winners with additional funds. Lottery taxes are deducted from annuity installments when distributed to winners. Furthermore, this strategy can help taxpayers avoid being put into a higher tax bracket.
Another advantage of choosing annuity payments instead of lump sum cash is winners can designate beneficiaries to receive unpaid funds if they die before all winnings are paid.
Winners that accept lump sum cash can transfer money to an irrevocable life insurance trust to reduce inheritance taxes for heirs. This type of trust is reserved for people that have over $2 million in estate assets.
If tax on lottery winnings is not remitted to the IRS by the due date, taxpayers will be subjected to late fees, penalties, and interest. Combined, IRS fines could tack on an additional 30 percent to the amount due.
In addition to owing federal taxes on lottery winnings, taxpayers are also responsible for remitting state income tax. In total, taxes can amount to nearly 50 percent of prize values.
Tax rates for lottery winnings are determined by taxpayers’ pretax income and the prize value. Winning millions of dollars puts people into a higher tax bracket which increases their personal tax rate.
Lastly, when people buy lottery tickets as a group it is important to draft a written contract that articulates how winnings will be divided and that each winner is responsible for paying their share of lottery taxes. It’s always wise to obtain help from accounting professionals to fully understand payment options and lottery tax rates.
About the Author: Learning about
helps winners expand their newfound wealth and pass along winnings to relatives. Financial planning expert, Simon Volkov talks about the advantages of establishing
annuity payments for lottery winnings
and shares personal finance tips at SimonVolkov.com.