A lot of people think that jackpot winners of the lottery are exempt from taxes since a government entity is running the lottery. For the most part, that is not true. Those who win a big jackpot from the lottery are going to have to give some of the winnings back to the government in the form of taxes. Depending on the state of residence for the winner, he or she may be liable for tax liability that reaches 50%. All lottery jackpot winners should expect that a significant part of their winnings will disappear due to taxes. It is important to understand the tax ramifications so that the lottery winner doesn’t get into trouble with the governmental taxing authorities.
A big chunk of the jackpot will be going to the federal government. By law, the lottery will need to withhold 28% of the winnings in order to make sure that the taxes are paid. However, the withholding is often not high enough to meet the total federal tax liability. That is why it is ey important ito make sure that the withholding is sufficient to cover all tax liability. If necessary, the tax liability for the lottery jackpot winnings should be made via estimated tax payments in order to ensure that the lottery winner does not incur any penalties for underpayment of estimated taxes. It is also important to do the same thing for state and local taxes as well. However, those who win the lottery should check to see if lottery winnings are exempt from state taxes. There are some cases it is exempt such as in California.
Another issue to look after winning the lottery is how to deal with the annual annuity payments from the lottery for many years. A lot of jackpot winners would rather spend all of the money right away. They have read lottery winning stories of people making their dreams come true. That would be a lot easier if the winnings were in a lump sum. Fortunately, there are companies that will buy the future income stream from the lottery jackpot in exchange for a lump sum. The problem with selling the income from the lottery is the taxes.
According to the IRS, getting a lump sum for the lottery is regarded as a sale. When the lottery winner gets the lump sum, part of the proceeds will have to be given to the federal and possibly state taxing authorities. This can greatly decrease the amount of money that is available for the lump sum.
One of the most important advice for those who win a big jackpot from the lottery is to hire a financial planner and a tax accountant. The tax ramifications will be huge. Bad investments and a outlandish lifestyle can drain big jackpot winnings quickly. There have also been some jackpot winners who mismanaged their winnings only to end up in bankruptcy. Avoid all of that by having a good financial plan to manage the lottery winnings. Hiring good financial experts is key to making sure that the lottery winnings are managed properly.