Posted: Thursday, Apr 23,2020 | Time: 11:36 am | Edited by: The Lottery Lab Staff
There is no doubt: winning a lottery changes a person's life dramatically! Voltaire once said Optimism is Madness. But this madness is quite relatable when it comes to playing and winning the lottery. A financial windfall of such grand magnitude can bless you with a level of financial freedom that many people have trouble imagining!
But there are somethings that becoming a million-dollar winner doesn’t change much. You still have to worry about bills and taxes. The Lottery Lab is here to assist you with a basic idea of how much tax you are likely to pay on your winnings. Considerations include not just how much you won but also the place from where you claim the prize. This basic tax information will help to plan your winnings wisely rather than spending more than you can afford.
It may seem that you have a long list of rules to follow through the process to claim your prize. These rules may appear confusing which is why The Lottery Lab, consistently encourages winners to seek professional advice on financial, legal, and tax matters. The rules and regulations pertaining to win constantly change so you should never hesitate in seeking professional and knowledgeable help. Having said that, a basic understanding of these issues can make your winning experience more successful and joyful.
When you win a lottery, the first question that erupts in your mind is -
Multi-million dollar Jackpot games usually offer winners a choice between a payout option of lump-sum or annuity. The annuity pays a portion of the prize every year for 20 to 30 years.
With the lump-sum option, winners get only a fraction of the Jackpot advertised. Many people believe that the lump-sum amount is lower than the annuity due to taxes. But the truth behind this difference is that lottery operators usually advertise the “total cash value” of the annuity instead of the “present value” of the annuity. At the most basic level, this difference means that the value of either the lump-sum or annuity option is the same. It’s completely at your discretion which payout option you choose; however, your financial advisor may recommend one option over the other as part of a tax sheltering strategy.
Once you have your money in hand, the question becomes: How much money can you keep and how much does the government want? Rest easy! The Lottery Lab Tax Calculator helps you answer this question. You just need to enter your winning amount and the State where you are claiming your prize. The tax calculator gives you an estimate of the final cash amount you will receive after the tax deductions.
Suppose you hail from Minnesota and won a Jackpot of$160,000,000, just enter these details and the estimated amount you may receive will be:
This is only an estimate of what you will have after deducting State and Federal taxes, but it can give you valuable insight into your true financial position. Suppose if you are claiming the same prize from Texas, you will receive an estimated amount which is much higher because of the state laws.
The Tax Calculator offers you the estimated amount of prize money you will receive according to the tax structure of your State and the amount of winnings. However, we sincerely advise you to always seek the help of a professional when dealing with your financial concerns.
Let’s have a look at the individual taxes that affect the Final Value of the Prize:
In the United States, people have to deal with these two taxes - the Federal Personal Income Tax and Social Security Tax. The primary source of tax revenue in the United States, as well as other states, is an income tax.
The Federal Personal tax is a straight forward progressive tax. The Social Security Tax is designed to fund Social Security and is actually made up of taxes applied to workers, their employers, and the self-employed. Lottery winnings are not subject to Social Security Tax, but the fact remains that if you haven’t paid enough for this tax, it can have serious implications on your future. So, you need to discuss Social Security with your financial advisor.
At the State level, the taxes are somewhat similar to the Federal Personal Income Tax. They usually have a simpler structure. Since each State manages its taxes differently, there is variation across the country, as we have noticed in the example of Minnesota and Texas.
On one hand, there are seven states that don’t tax personal income, namely Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming along with two states that only tax investment income and interest, namely New Hampshire and Tennessee. Then there are certain States that have multiple tax brackets such as Carolina which has 9 tax brackets ranging from 1% on the first $8,544 of taxable income all the way up to 12.3% on $572,981 and above.
While playing the lottery there is a very important aspect that we should be aware of. Suppose you are a resident of one state and have purchased a lottery ticket from another state. When you win the jackpot, where do you have to pay the taxes? In some cases, there is a reciprocal agreement that helps the States divide the taxes among them. But in some scenarios, both the States expect to be paid, one because the money is earned by the resident of their State, and the other because the money was earned in their State.
Even before you see a dollar of your winnings, the IRS will make some deductions. Lottery winnings over $5,000 are subject to a 24% withholding rate, which needs to be kept in mind before picking up that giant check. It’s really important that you work with your financial advisors closely to ensure that you don’t get surprised by any heavy taxes.
These are the basic tax structures that a new winner faces when they win the Jackpot. We highly advise you to seek help from a knowledgeable team of experts, to manage your financial and legal concerns for a smooth claiming and allocation process. Winning a lottery, especially a large sum, can be life-altering. You can either set yourself up for financial wellness for the rest of your life or get on a roller coaster ride that leaves you broke. The best thing to do is always calculate your tax liabilities with a certified accountant or financial advisor and then plan wisely on managing the rest of your cash.