Learn more about what happens when a player wins a jumbo jackpot, examining if the winnings are taxed, what experts have to say and what to do after winning.
Playing the lottery has its upsides and downsides. The downside is you may not win even after trying your best. The upside is you may walk away with a trophy, in this case, a jumbo jackpot like Powerball and Mega Millions. However, winning a lottery is one thing, and having the knowledge of how to manage the money is another.
Most players usually have everything planned out how they will spend the money until they get it and everything changes. This is to say, the path of managing lottery winnings is not as easy as people may think. This article discusses more about the intricacies of lottery payouts, taxes, and advice from experts that you can get on the best casino gaming platforms.
The Payouts and Taxes: Installments Vs. Lump Sum
When it comes to the big winnings, most players like to choose the lump sum option instead of the installment option. What players may not know is that every choice comes with significant financial implications, as discussed below:
1. Lumpsum Option
If a player decides to go the lump sum way, they may get a time value of money discount ranging from mid 30% to high 39%. If the prize is larger, the lottery commission’s initial investment may compound over time, resulting in smaller annual returns.
The tax impact, on the other hand, for lump sums can’t be overlooked. For instance, if a player takes a lump sum, they have to pay 100% of tax (in the first year). Not to mention, although some American states exempt lottery winnings, there are others where state taxes apply.
2. Installments Option
If a player does not get tempted enough to choose to get all their money immediately and therefore opts for installments, they get every penny of the advertised winnings. The installments provide a steady income for the winning players, allowing them to effectively manage their newfound wealth.
The tax liability is usually spread out over several years, which helps minimize the winner’s tax burden. If the winner chooses to sell the future income stream, the proceeds are considered ordinary income and not capital gain. If let’s say the winner lives in California, they may not pay tax since it is a tax-free state for lottery winnings.
Additionally, if a player chooses to receive their winnings in installments they have to report their winnings every year and would still be subject to top Federal income tax rates (as per the IRS requirements) remember as the annuity payments increase over the years so do the taxes.
If the winner passes away, the installment payouts still continue. The payments are, therefore, made to heirs since a laddered bond portfolio backs the obligation.
Note that since the U.S. tax system is progressive, not all player winnings are taxed at the top rate, which means some of them might be taxed at lower rates. Thus, the place of residence determines if the winner must pay state income taxes or not. Examples of states that don’t have income taxes include Texas, Florida, Nevada, Wyoming, Tennessee, and Washington.
Getting Help and Advice From a Team of Experts
Getting newfound wealth is a good thing, but if you don’t know how to go about using your winnings, you may fall into a whirlwind of temptations or even become a victim of fraud. So, what should you do after winning the lottery? You should immediately seek help and advice from trusted experts. You may need a lawyer, a financial advisor, and an accountant.
Normally, there is a question of if the lottery provides players with resources and financial advice on how to utilize their winnings. The answer to this question is that usually, the lottery offers the winner general advice on what to do after winning, but the recommendation of a specific lawyer, financial planner, or firm is not allowed. However, in most cases, players are most likely to end up with a financial expert. Here is what winners need to do:
Seek professional guidance from financial advisors who can help you develop a solid, detailed financial plan that includes tax optimization strategies, investment techniques, and estate planning. A senior vice president at Wealth Enhancement Group, Stacy Coffey recommends getting a Certified Financial Planner (CFP) because they always act in the best interest of the player.
She also adds that it is important for players to get a financial advisor who feels comfortable talking to them. Some of the best resources that players can leverage when in need of financial expert advice and help include:
- CPF.net
- Financial Industry Regulatory Authority’s BrokerCheck website.
The second thing is seeking help from legal counsel by engaging an attorney specializing in tax matters and estate law. Legal counselors will guide you through legal complexities like minimizing tax exposure and setting up trusts.
Third on the list is seeking privacy protection. This may look something like remaining anonymous because we all know publicizing your win normally attracts potential risks, unwanted attention and people with no good intentions (e.g. scammers). A player can consider changing their phone number or changing key identifying information like their address just to stay anonymous for a while.
After seeking financial guidance, you can proceed to do the following:
- Diversify your investments to help manage risks effectively. If you take a lump sum, it is better to invest it in a diversified portfolio rather than putting all your eggs in one basket.
- Have well-defined long-term goals. You can plan for early retirement or travel. The most important thing is to ensure your decisions align with your aspirations.
- Have an emergency fund set aside. It helps ensure financial stability when things are shaky or in unexpected situations.
Always make informed decisions, seek professional financial and legal help from trustworthy experts, implement smart financial techniques and learn how to navigate the path of financial fulfillment and security with big winnings.
