Lottery taxes are an unfortunate side effect of winning lottery jackpots and prizes. Whether you win a car, vacation, or cold hard cash you need to hand over a good chunk of change to the IRS.
Lottery taxes are a confusing topic for most people, so if you're fortunate enough to win big bucks it's a good idea to talk to a tax accountant. One thing is certain, whenever you win a valuable prize or cash the lottery board reports winnings to the IRS.
If you don't report lottery winnings on personal tax returns the tax man will be sending you a notice that includes late fees, penalties, and accrued interest that can amount to 28 percent or more than the original lottery taxes.
Lottery taxes are calculated based on your personal gross income and the fair market value of the prize. If you win lottery jackpots your tax bracket could rise and result in higher taxes.
All lottery prizes are subjected to taxation at the federal level. If your state assesses income tax you'll also have to pay state taxes. Combined, these taxes could be as high as 50 percent or more of total prize value.
Think about that for a moment. If you won $20 million in a lottery jackpot you'll probably only take home around $10 million. While $10 million is a good amount, it's somewhat sickening that you have to lose the same amount for the sake of taxes.
One strategy people use to lower taxes is to accept lottery winnings via annual payments. Winners of lottery jackpots can accept payments over the course of 20 years instead of taking lump sum cash. Instead of paying the full amount of lottery taxes upfront, winners only have to pay taxes during the year that the money is received.
When lottery winnings place a person into a higher tax bracket they may need to remit tax payments throughout the year. Estimated taxes are paid on a quarterly basis, so it is crucial to make certain you meet filing deadlines or you could be penalized for late payment.
A lot of people pool their resources and buy lottery tickets as a group. While this strategy can improve chances of winning, it can create a tax nightmare for the person that buys the winning ticket.
There are many things to consider when buying group-funded lottery tickets. It's always a good idea to draft an assignment of winnings agreement amongst everyone participating. Otherwise, the ticket holder could end up being responsible for the full tax amount. Furthermore, when funds are distributed to the group, each individual could be assessed a gift tax.
Lottery taxes can become even more confusing in cases of divorce. If you and your spouse win a lottery jackpot and accept installment payments, then later divorce, your divorce lawyer will need to assess the best strategy for dividing future payments.
Last, but not least, if you inherit lottery winnings from a deceased relative the funds are likely to be subjected to estate tax. As long as decedents engage in proper estate planning procedures, funds acquired from jackpot lotteries might be exempted from estate taxes.
It's highly recommended to work with an estate planner before gifting lottery winnings to heirs. If you already have estate planning in place prior to winning lottery money it's a good idea to revamp your plan and establish tax-saving strategies so loved ones won't be saddled with the responsibility of sorting out the details.
We invite you to learn more about lottery taxes and safeguarding winnings via estate planning in our personal finance article library. While we don't offer legal or tax advice, we do provide information to help visitors locate the resources they need to report lottery winnings and reduce taxes.