Basic Overview of Lottery Taxes

December 23, 2011 by  Filed under: Taxes 

Lottery taxes are the unpleasant side of winning mega-million jackpots or other valuable prizes offered in state and national games. While winners still receive a huge amount of money it can end up being about half of the actual prize amount by the time taxes are taken out.

Lottery taxes are assessed on cash and non-cash prizes won through legal gaming. This includes national lottery games such as Mega Millions and Powerball and cash or prizes from scratch-off tickets, raffles, sweepstakes, contests, or casinos.

Anyone that is fortunate enough to win the lottery should immediately hire a trustworthy financial planner or certified public accountant. It’s imperative to obtain professional guidance when winning thousands or millions of dollars. Most people have no idea how to reduce lottery tax burdens or put their newfound wealth to work for them.

Instead, most get caught up in living the life of a millionaire and find their self broke within a few years. For most, it’s hard to imagine squandering millions, but it has happened to several winners that had no money management or investment skills.

Jackpot earnings must be reported on personal income tax returns. However, gambling losses can also be reported, as long as there is sufficient documentation including receipts, void tickets, and accounting records.

Winners need to pay taxes when they are due. Much depends on the amount and date when the money is won. Taxes might be withheld from the winnings when funds are distributed or winners might be required to pay in quarterly or annual installments.

If tax installments are not remitted on time the IRS assesses late fees, penalties, and interest. Combined, fines can amount to as much as 30 percent of the amount owed.

Winners are responsible for paying state and federal taxes, unless their state of residence does not collect income tax. Taxpayers pay an average of 45 to 50 percent of the total prize value.

The lottery tax rate is determined by the prize market value and amount of taxpayers’ pretax income. Winning jackpot lotto places taxpayers into a higher tax bracket and requires filing itemized returns.

For obvious reasons, it is imperative to receive professional guidance and learn about tax rates for lottery winnings, along with payment options.

Winners can take advantage of strategies to reduce tax liabilities when they win mega jackpots. One of the most common is to establish annuity payments that provide a fixed amount of income for 20 years.

Accepting annual payments can actually place more money in winners’ pockets. Lottery taxes are paid when the annuity payment is distributed. Furthermore, taxpayers aren’t thrust into the highest tax bracket and might be able to take advantage of itemized deductions to reduce the payable rate.

Another advantage of establishing annuity payments is winners can appoint beneficiaries to receive winnings if they pass away before receiving the full amount. Money can also be transferred into an irrevocable life insurance trust to reduce inheritance and estate taxes for beneficiaries.

Lastly, lottery taxes can become complicated when winning tickets are bought through office pools or money contributed by several people. It is always recommended to execute a written contract stating how winnings are to be divided and that each person is responsible for reporting their winnings and paying appropriate taxes.

Learning methods to reduce lottery taxes can help winners expand their wealth and provide inherited wealth to their loved ones. California real estate investor, Simon Volkov shares investing and personal finance tips, and discusses the advantages of accepting lottery winnings via annuity payments at SimonVolkov.com.

Article Source:
http://EzineArticles.com/?expert=Simon_Volkov

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