Death and taxes. According to Benjamin Franklin, those things are the two main certainties in life, even if you get lucky and win the lottery.
While you may want to quit your job right away and go on a shopping spree, you have to be smart financially. Otherwise, you could be in a situation where you owe back taxes.
Lottery taxes are becoming more of an issue, especially as jackpot winnings get larger. Over the past few years, we’ve seen lottery awards over a billion dollars.
You certainly don’t want to be another story of a lottery winner gone bankrupt. You have to account for taxes on your winnings.
How much will you owe in lottery taxes?
Keep reading to find out.
Lottery Winnings Are Income
The first thing that you have to understand about winning the lottery is that you have to think of it as income. That’s how the IRS and state tax authorities see it.
It’s not a bonus, it’s not that you got a lottery ticket on the side. It’s income, just like the income you get from your job. Just like your paycheck, taxes are withheld from your lottery winnings.
It’s actually a legal requirement for lottery officials to withhold 25% of your winnings if you win more than $5000 in the lottery.
How Much Will You Pay in Lottery Taxes
There is no set number as to how much you’ll pay in lottery taxes. Yes, 25% is automatically withheld for federal taxes, but there’s a good chance that you’ll owe more.
How much you have to pay in lottery taxes depends on a few factors: how much you won, whether you took a lump sum or installment payments, your location, and other tax deductions.
Remember, your lottery money is taxed as income. The more you’re paid, the higher the income bracket you’re in.
It’s not just federal taxes that you have to worry about. States also get a cut of lottery winnings, too. That’s taxed as income just like at the federal level.
Some states won’t tax you on your lottery winnings because they don’t have an income tax. California won’t tax you on Superlotto or on other lottery winnings.
Other states will tax you and then you may have to pay local taxes on top of that.
How to Minimize Your Tax Burden
You can’t avoid taxes altogether, but you can lower your tax burden a little bit. You know that the IRS already withholds 25% of your earnings.
Think of that like a regular tax withholding in your paycheck. At the end of the year when you do your taxes, you may have had too much withheld, which would give you a tax refund. If too little is withheld, then you’re in for a hefty tax bill.
These are some of the strategies you want to employ to claim more deductions and lower your tax bill.
Get a Good Team Around You
You’re not a tax expert. Nor are you likely to be a wealth management expert. The first people you want to talk to are tax advisors. They can help you decide whether it’s better to take the lump sum or if you should get paid in installments.
The great thing about winning the lottery is that you can share your winnings with your loved ones. You can spread the love and help others live their dreams. You can also make that money last for generations if you set yourself up right from the start.
In order to do that, though, you need a wealth manager or financial advisor who has the experience to help you reach long-term financial goals. They can also tell you how much you should spend because after all, you deserve to enjoy yourself.
It’s a big responsibility to have a lot of money. One of the things you’ll notice is that you’re going to get a lot of people and organizations asking for help.
Charitable donations are a great way to offset some of your taxes, but you want to be smart about who you help and how your resources are being spent. You want to be sure that the people you donate to are good stewards with money and they don’t throw it away.
It can be hard to tell the good from the bad. There are people who are charitable advisors and can help you make smart decisions with your newfound wealth.
Investing Your Money
There are some investments that can generate profits and reduce your tax bill. Some real estate investments will create a profit on rent. That profit will be taxed as capital gains, which is taxed at a much lower rate than income.
Estates and Trusts
You don’t need to be concerned about this right away, but you do need to make sure that your money isn’t taxed when you pass away.
Your money is essentially your estate and you need to have the proper estate and trust funds set up to protect your wealth. You’ll be able to pass more on to your loved ones rather than paying the government.
Winning the Lottery Is Great, Even With Lottery Taxes
Winning the lottery can be a life-changing event. You can win enough to finally take an amazing vacation, sail around the world, buy your dream home, and take care of your family for years.
The downside of all of that is lottery taxes. It’s a necessity that can take all of the excitement out of winning. You have to be aware of your tax obligations before you go on a spending spree.
What you can do is get a group of tax experts around you who can advise you on the best strategies to minimize your tax bill.
The key is to think clearly, rationally, and get expert advice before going crazy. You can then enjoy yourself knowing that you’re financially set up for years.
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