Winning the lottery is a life-changing experience, no matter the amount of money. You get to put your name on an exclusive list of winners.
You may already have on your mind what you’re going to do with the money. Help family, pay off debt, buy real estate or cars, go on vacation.
There’s a catch. The amount you win isn’t the amount you’re taking home. Why?
Taxes. There are taxes on lottery winnings that you have to be aware of. Read on to discover all you need to know about lottery tax.
Taxes on Lottery Winnings
Lottery prizes are taxed at the federal and state levels.
The lottery prize tax you pay depends on how you want to receive the money. You have the option to receive it in a lump sum or annuity payments over a longer period of time.
Since each choice has financial implications, it’s in your best interest to consult with a tax attorney, certified public accountant (CPA), or certified financial planner (CFP) to help you make the right decision for you and your family.
Some financial advisors will recommend the lump sum since the return on investing in stocks is much better.
On the other hand, receiving annuity payments over time will allow you to take advantage of your tax deductions each year.
When you play the lottery, you are gambling. As a result, the proceeds are considered gambling income.
What does this mean for the lottery payout? There is a 24 percent federal tax for jackpot payouts of $5,000 minus the wager.
The state taxes the money as well, so you could end up paying 50 percent in taxes based on other income, which may bring down your payout significantly.
For lottery winners out there, Tax Act has a great tool to help you calculate federal and state taxes depending on where you live. It gives the option to see the large sum and annuity payment amounts.
A Big Lottery Win = More Money for Uncle Sam
For example, a couple of years ago, a person in Wisconsin a Powerball drawing of $768.4 million, which was the third-biggest lottery win in U.S. history.
Based on the calculations done by CNBC, taking the cash option would have been $477 million.
Based on the 24 percent tax withholding, $114.5 million would come off of that and the IRS would take $62 million for a grand total of $176.5 million.
The winner had $300.5 million left after taxes.
With your lottery winnings, you’re going to need a trusted firm that is experienced in structured settlements.
Rightway Funding believes that stressing about getting your money should be the least of your worries. Read more here.
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Don’t let the taxes on lottery winnings throw you off. Be prepared and celebrate the victory stress-free.
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