When you envision yourself winning the lottery, do you take into account the part where you have to pay taxes? While it’s not the most exciting of topics, it’s important to understand how much of your money you’ll actually be taking home.
Any money you win will be taxed as if it’s income. There is a general breakdown of how much you will be required to pay in taxes; however, the exact amount will depend on where you live and how much money you won. Javier Simon, a writer for smartasset.com states, “Before you see a dollar of lottery winnings, the IRS will take 25%. Up to an additional 13% could be withheld in state and local taxes, depending on where you live. Still, you’ll probably owe more when taxes are due, since the top federal tax rate is 37%.” Given this information, it’s a good idea to set aside a large portion of your winnings to save for taxes. You could even consider not spending any of your winnings until you’ve spoken to a financial professional.
Before you start feeling depressed over all the money you’ll have to give up, remember that you wont be taxed in the top bracket for your entire prize amount. Simon also mentions, “On the bright side, if you’re in the top bracket, you don’t actually pay 37% on all your income. Federal income tax is progressive. As a single filer and after deductions, you pay: 10% on the first $9,700 you earn, 12% on the next $29,775, 22% on the next $44,725, 24% on the next $76,525, 32% on the next $43,375, 35% on the next $306,200, and 37% on any amount more than $510,300.” Again, the dollar amount of taxes you’ll end up paying depends on how much you win. Obviously, the more you win, the more you’ll owe.
Collecting your Money
When you win a large sum of money, you have the option to take it in a lump sum, or have it paid to you over the course of many years. Which method is better for tax purposes? With any big financial questions, you should consider speaking to a professional. They will be able to tell you which option to take in order to keep yourself in the lowest tax bracket. They can also recommend how to proceed with investments, gifting money to friends or family, and putting money away for retirement. Keep in mind, if you fail to consult the right people, your tax liability will be more than you can likely pay on your own. It is all too common for winners of the lottery to end up filing bankruptcy within a few years. Hiring the right people will help you avoid being part of that statistic.
Paying taxes on your lottery winnings is something you can’t avoid. Take the proper steps and consult the right people to ensure you’ll be enjoying your money for years to come.