Taxes on Lottery Winnings

Lottery can be considered as a sort of gambling with numbers, and lottery winnings are like the wildest dreams coming true. The prizes for winning a lottery can be given in a fixed cash amount or in the form of goods. Along with the euphoria of hitting the jackpot, there are also several legal issues that are associated with lottery winnings. Like gambling, the winner always prefers the cash to be paid in full, so taxes on lottery winnings come as a damper to squash the euphoria. Hence, as per expert's advice, it is always advisable to consult an experienced attorney, regarding the effective options of collecting the cash. Let's take a look at the taxes applicable to lottery winnings.

Taxes on Lottery Winnings: Points to be Noted

Both federal and state taxes are applicable on lottery winnings, though in some regions, lottery winnings may be subjected to local income taxes too. The total tax percentage may vary, based on the winner's annual income and the total winning amount. After calculating the taxable amount imposed by the federal and state jurisdiction, the taxes may total up to half of the lottery amount.

According to the jurisdiction of the concerned state, there may be options of receiving the lottery winnings. In general, there are two choices, namely; lump sum payment and installment payment. Also, the taxable percentage may change according to Internal Revenue Service regulations. The following is a brief discussion about lump sum cash payments and installment payments of lottery winnings.

Lump Sum Cash payment
If a winner has selected a lump sum payment of the lottery amount, the lottery commission pays about 65 percent of the total cash. This amount is subjected to the federal and state taxes, which may amount to about 50 percent of the remaining money. For example, you won USD 1,000,000 lottery and the lottery commission gives you USD 650,000. After tax deductions, the amount you receive could be just about USD 325,000.

Installment payment
Speaking about the installment payments of lottery winnings, the ideal option is to select for a structured annuity plan. Under such annuities, insurance companies are involved, which are responsible for payment in small fractions at regular intervals along with increments. The major advantages of installment payments for lottery winnings are low tax rate and a long-term income source.

To be precise, people who have selected the option of a lump sum payment will receive a lesser win amount than those who have opted for payment through installments, even if the winning amount is the same. On a general note, the winning amount runs its course within five years for a majority of people, who opt for a lump sum payment. Hence, a lottery winner should compare the pros and cons of the various collection choices for lottery winnings, and plan for a long-term source of income.

Among the myriad moneymaking ideas, lottery tickets are probably the most sought after, as many people believe that winning a lottery will solve their financial problems, which is not true. It entirely depends on how well you manage the prize amount. A little financial planning goes a long way, hence one of the best tips is to invest the winning amount. While investing, it is always advisable that the money should be dispersed equally in risk investment plans as well as safety plans. At any point of time, a financial adviser is the best person to rely on, while dealing with tax liability and investment options. So, if you ever win a lottery of a specified amount, don't go making big plans only to see them crash, due to the high percentage taxing on lottery winnings.