When people dream of winning the lottery, they give little consideration to the taxes they'll pay on that money. Most imagine the mansion, luxury car or yacht they'll buy, along with quitting work and traveling the world. But if you hit the jackpot, Uncle Sam will come calling all too soon. It's important to think about both state and federal taxes if that lottery ticket pays off, whether you win a billion-dollar Powerball or $1,000 on a scratch-off ticket.
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Tax Rates
If you live in Florida, you're in luck. Florida is one of six states with no state income tax. This will save you millions if you win the big jackpot. But you'll still be responsible for federal taxes, which can be quite hefty.
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The federal government requires Florida winners to deduct 24 percent from any winnings of more than $5,000. Winners of $5,000 or less aren't required to deduct federal withholding taxes from any monies they receive. For Florida residents who don't have a Social Security number, the lottery is required to withhold 24 percent on winnings of more than $600. Nonresident aliens will see 30 percent withheld on winnings of any amount.
Cash vs. Installments
If you win a Powerball jackpot worth millions, one big factor impacting your tax burden is whether you take the money in a lump sum or you accept it as an annuity, which pays the money over many years. Most people choose the lump sum, either because they want to go on a spending spree or they fear they won't live long enough to enjoy 30 payments over 29 years.
Although it can vary from one person to another, the annuity can be a better option, tax-wise. The year you receive your lottery payout, you'll be subject to income tax on those earnings, which will be the full 37 percent, since you'll fall in the highest tax bracket. You'll be credited for the 24 percent you paid when you accepted the lump sum payment. If, on the other hand, you have a small amount issued each year, your tax burden may be smaller, depending on the amount you win. But the biggest benefit of having your money issued gradually is that you won't feel tempted to spend it all at once and end up with nothing to show for it, as the majority of winners do.
As fun as playing the lottery can be, you'll need to think carefully about your options if you win. In Florida, you'll save money on state income taxes, but you'll still be on the hook for nearly 40 percent if you win more than half a million dollars on a ticket. The best move is to consult a financial expert for advice before you claim your winnings.