Woohoo, you finally won the lotto and now get to scoop up all that cash! But wait, what are all these taxes? Many people don’t realize the actual amount you walk away with once those sneaky cuts wreak havoc on your grand prize. Here’s the truth about lottery winnings and the taxes that are placed on them.
When taxes attack
Winning the lottery is seen as the ultimate stroke of luck. However, you may actually need that luck for after you turn in that ticket. Lottery winnings are seen as taxable income, which means they’re subject to both IRS and local taxes.
That means the Internal Revenue Service withholds 25% of your prize before you can even access it, and you’ll still (most likely) owe even more on tax day. Then you have to pay state taxes, that range from 3% to 8.2% depending on which state you reside in. Yikes!
How payouts work
The total taxes you pay depend on how you want to claim your money. The two current options are a one-time cash payout and a 30-year annual payment plan. Since there’s a history of winners choosing the lump sum payout and then irresponsibly blowing it all away, you may think the annual payment plan is the way to go.
Yet, with taxes, it’s actually better to take the full amount. If you do that, you pay the income tax up front instead of having to pay taxes on each individual installment as the years go by. The end amount could be way less than just biting the bullet on that first big payout.
Maximize your winnings
The first thing anyone should do when winning the lottery is to consult an expert. Go to your accountant or seek out a financial advisor to help you manage your newfound wealth.
Take the lump sum for tax purposes and then invest a good amount to grow that green. Make that luck last and be responsible!