Lottery taxes are the downside of winning large sums of money or valuable prizes in state and national games. One thing is certain. If you don't pay the IRS the tax man will be knocking on your door. Just ask Richard Hatch, winner of the reality show Survivor.
If you don't pay lottery taxes when they're due, you'll end up owing the IRS even more. They can assess late fees, penalties, and interest that continuously accrues until it reaches maximum level.
The first thing jackpot lottery winners should do is talk to a financial planner or tax accountant. They could also arrange a meeting with the IRS. The point is to get professional help and eliminate the risk of making costly mistakes.
People that buy lottery tickets or engage in other forms of gambling on a regular basis should keep record of their winnings and losses. The IRS does allow a deduction for losses to taxpayers that itemize deductions.
Taxpayers will need to provide detailed records including receipts, non-winning lottery tickets, raffle tickets, and casino statements. Depending on prize value, the prize provider might supply taxpayers with a W-2G form and withhold federal taxes.
Anything that is won through gambling is subjected to lottery taxes. This includes winning prizes from raffles, contests, and sweepstakes; cash or prizes from casinos; money from dog or horse races; as well as vacations, cars, boats, and non-cash prizes.
The amount of payable tax is calculated on the fair market value of the prize, along with amount of personal pretax income. People that receive jackpot lottery winnings worth millions are put into a higher tax bracket and subjected to higher tax rates.
Furthermore, jackpot lottery winners usually have to send quarterly payments to the IRS throughout the year. If tax payments are owed and winners don't remit funds on time, they will incur late payment penalties and charged interest from the first date payments are late. These penalties can add up to nearly 30 percent of owed tax, so it is crucial to become educated about tax guidelines regarding gambling earnings.
Winners have to pay federal and state lottery taxes, unless their state does not collect income taxes. On average, taxpayers should anticipate paying around 50 percent of the prize value.
There are a few ways to lessen tax burdens when winning mega lottery jackpots. The most common is to setup annuity payments that supply fixed income over an extended period of time.
While most of us dream about having millions of dollars in our hands, when winning millions through lotteries nearly half the amount won goes to paying taxes. With annuity payments, taxes are paid when income is distributed. In most cases, lottery winnings are paid over periods of 10 to 20 years.
By breaking the jackpot into smaller annual amounts, taxpayers might be able to maintain their current tax bracket and pay fewer taxes. In turn, they accumulate more of their winnings and have guaranteed income for several years.
Another benefit of setting up annuity payments is winners can designate beneficiaries to receive the money if they die before it's completely paid out. Funds can also be set aside in an irrevocable life insurance trust to lessen estate tax and inheritance tax burdens for beneficiaries.
Lottery tax consequences can occur when winning tickets are purchased by a group of people. Financial experts recommend writing up a contract about how the winnings will be divided whenever they contribute to a group fund used to purchase lottery tickets.
As you can see there are many things to think about when winning lottery jackpots or valuable prizes. The best place to obtain advice regarding lottery tickets is from the IRS or tax professionals. In the meantime, we invite you to learn ways to protect winnings and reduce tax obligations by perusing our personal finance article library.
Published on November 29, 2011 at 03:15 AM
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