There’s been a few large lottery payouts recently and a lot of people wonder what would happen if they were lucky enough to win. If you win one of the big lottery jackpots, you’ll be an instant millionaire regardless of how much taxes you end up paying. But just in case you want to know anyway, here is what to expect in taxes if you win a lottery jackpot. It’s a good thing you’ll be winning millions in a lottery because you’ll be paying millions in taxes.
First you must decide on the payment method. If you win the lottery you’ll be asked to choose whether you want the money as a onetime lump sum, or in a series of installments over time. There is much debate over which is better, the lump sum or the installment plan? Typically, if you choose the lump sum, you’ll be receiving about half of the winning amount, with the installment plan you’ll receive the entire amount but over a term, usually 26 years.
For the lump sum, your taxes will be paid before you receive anything. As of 2012 you would be taxed at a rate of 35% if you won say $100 million, you would pay $35 million, leaving you with $65 million. That’s just the IRS, you then must deal with local and state taxes and those all vary. Some states, like California don’t tax lottery winnings, but most do.
For the installment plan the taxes are basically the same only spread out over the length of the payment term. If you get $10 million a year, you pay $3.5 million a year in federal taxes and more for the local and state.
Is there a tax advantage to taking either the lump sum or the installments? Some people say that it is better to take the one-time lump sum because taxes may change over time and you may end up paying more in the future. Either way, you’ll still be a millionaire, and that’s always nice.