For a person lucky enough to win big on the lottery, there are two ways to take the money. The first is as a lump sum, in which case all taxes are taken from the money prior to distribution and the remainder is paid to the winner. The other way to receive lottery winnings is as an annuity, which is a fixed amount of money that is paid annually for a set period of time, usually 20 or more years. In this case, taxes are normally withheld from each payment.
Types of Annuities
There are two types of lottery annuity payments. The most common type consists of a specific number of annual payments until the entire amount of the lottery jackpot has been paid. The other type of annuity only pays as long as the winner is alive, and payments stop when the winner dies. State lottery winnings are normally paid as a set number of payments, and the money will go to a person’s heirs if she dies before the payout is completed.
Both state and federal taxes are typically withheld from lottery annuity payments. Federal taxes are withheld at a flat rate of 25 percent. The amount of state tax that is withheld varies widely by state. If a winner is expected to have additional tax liability, he may be required to pay an estimated tax in addition to any withholding. The amount paid in estimated tax should be enough, when combined with the flat-rate withholding, to cover the anticipated amount of taxes due.
A lottery winner’s tax liability is determined by a mix of different factors. The size of the annuity payment, the winner’s overall worth and any other income he may have all figure into his tax liability. Types of investments, charitable contributions and other factors can also impact taxes. The exact amount due is best determined by a qualified tax professional. There are often ways a winner can reduce his tax liability, but these vary greatly by individual circumstance.
Each state has its own rules regarding how lottery annuities are taxed. In some states, lottery winnings are not taxed by the state. In other states, the rates run anywhere from less than 4 percent to over 9 percent, as of 2011. A person who gets a lottery annuity from one state but lives in another state may have to pay the taxes applicable to both his place of residence and the state where the ticket was purchased, depending on the situation. The tax in the state where the ticket was purchased is paid first; then, if the winner’s home-state tax is higher, he must pay the difference. If there is no tax where the ticket was purchased but there is in his home state, he will have to pay the full amount to his home state. If there is a tax where the ticket was purchased but none in his home state, he will have to pay the full amount to the state where the ticket was purchased.
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