Lottery winnings can be a blessing or curse. While everyone dreams of winning a lottery jackpot and becoming an instant millionaire there are certain considerations which should be reviewed before cashing in that winning lottery ticket.
Lottery winnings are subject to both state and federal taxation. Combined, these taxes could amount to 50 percent of the winnings. Individuals who elect to receive a lump sum payment for their lottery winnings receive considerably less than individuals who elect to receive payments over a period of time.
Jackpot lottery winnings are generally paid over the course of 20 to 25 years using a structured settlement annuity. These annuities are backed by life insurance companies and paid out in smaller increments. This places lottery winnings in a lower tax bracket and allows for a larger payout with less taxation.
When lottery winnings are dispersed in a lump sum cash payment, the Lottery Commission typically pays around 65 percent of the actual amount won. For instance, if lottery winnings are $1 million, the lump sum payment would amount to $650,000. Throw in the 50-percent combined tax rate and final payment only amounts to $325,000. That's a huge difference in payout, wouldn't you agree?
Prior to deciding whether to accept a structured settlement annuity or lump sum cash payment, lottery winners should consult with a professional financial advisor. It is suggested that nearly 75-percent of lottery winners elect to receive the lump sum cash payment. Of those, nearly 90-percent are broke within five years. Avoid being a statistic by becoming educated about investment options for lottery winnings.
There are multiple ways to invest lottery winnings which can double or triple your earnings. When possible, it's best to plan in advance for major lottery winnings. Significant savings can be achieved by examining and understanding the taxpayer's current situation and the impact jackpot lottery winnings will have on their tax bracket.
While lottery winnings provide the opportunity for financial freedom, it also presents complex tax issues which require careful attention and planning. Thoughtful application of investing techniques can minimize or eliminate many of the tax consequences associated with jackpot lottery winnings.
Published on July 18, 2008 at 09:44 AM | Comments: 40