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Minimizing Lottery Jackpot Taxes

Posted: Wednesday, Jul 03,2019 | Time: 01:31 pm | Edited by: The Lottery Lab Staff

minimizing-lottery-jackpot-taxes

Winning a lottery can be your dream come true, especially when you win big. You can buy a house, a car, a vacation, a dream wedding, or all of them, depending upon the amount you’ve won. But there is someone else who is really excited about your good luck: the taxman. You don’t have many choices in handling the windfall, but you can try to minimize lottery jackpot taxes.

The first concern is how you’re planning to receive your winnings. Most lottery games give you two options: Lump sum cash or an annuity (annual installments spread out over years or even decades). Each choice has its own financial implications. This is one reason why you absolutely need to consult with your tax attorney, CPA (Certified Public Accountant), or CFP (Certified Financial Planner) to discuss the implications before deciding how to collect your prize.

Thinking strictly from the tax viewpoint, annuities have some major advantages over lump-sum payments. Let’s assume you won a $1 million lottery jackpot. If you take the lump sum, your total federal income taxes are estimated to be about $370,000 because most of your winnings fall within a tax bracket of 37%. However, if you decided to take the jackpot in 20 annual payments of $50,000 a year, and to keep it simple let’s assume that you don’t have any other source of income,  your income is only in the 22% tax bracket. Your total federal income taxes are estimated at $11,000 a year or $220,000 after 20 years (assuming that the tax rate for this amount wouldn’t fluctuate in the future). You have saved around $150,000 over the 20-year period. The table below simplifies the estimations of Lump-sum versus Annuity taxes.

Total Winnings$1,000,000$1,000,000
Payments120
Paid Out in Year 1$1,000,000$50,000
Taxes in Year 1$370,000$11,000
Total Taxes Paid$370,000$222,000
Tax Savings $0$150,000
Winnings Received Over 20 Years$630,000$778,000

It is not easy to win your lottery money so saving it once you have it is important. Saving it from taxes is one of the most important elements of your strategy. If you go for the annuity, you can keep your money coming for decades. This will save you money and can discourage you from spending it wildly. The main limitation of the annuity payment method is that you can’t make big investments because you will never have a single large amount.

Disclaimer: The tax calculations provided in this article have been simplified to demonstrate the principles discussed.  The calculations do not represent the entire set of tax considerations.  Seek professional legal advice before making any decision.

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