Life is full of tough choices, but there’s one difficult decision that everyone wishes they could make: How to collect their lottery winnings.
If you’ve just hit the jackpot, then you can collect your money in a lump sum right away, or in a series of regular payments for a significantly higher amount, but paid over a span of about 30 years. Both options have benefits and drawbacks, and both options face inevitable taxation. But if you’re looking to minimize your tax burden, then you’re in the right place.
“The first decision – even before you play – is whether to take the annuitized payout or the lump sum,” John Loyd, a tax professional and owner of The Wealth Planner in Fort Worth, Texas, tells Lottery Geeks.
While you can maximize your winnings by collecting a lump sum and investing it immediately, you can also gain flexibility, structure, and decades of security by choosing to receive regular payments over the long haul. But when it comes to how they’re taxed, both options lose some luster.
Getting it over with, or not
“The lump sum will be like ripping a Band-Aid off a hairy chest, very painful but quick,” says Loyd. “With the payout over time, one can spread the tax out. However, one has to be mindful if tax rates rise in the future… one could then be paying more in tax.”
We do know where the rates stand today. Before accepting a payout, lotto winners can expect a 24% mandatory federal withholding that goes straight to the IRS. If you accept a lump sum, then you pay all of that right away. If you accept an annuitized payout, the 24% federal tax would apply on each new installment. This is, of course, assuming you plan to win more than $5,000, which … well, why else would you be here.
There’s also a chance that your win will send you in the tax stratosphere, and place you squarely in the nation’s top tax bracket. As of 2023, that bracket places a 37% tax on anyone with income of $578,125 or more (or $693,750+ for married couples filing together). That’s applicable even for people who won money after entering a lottery pool.
But Loyd warns that 37% might become 40% in the future.
“A good example is the sunset provision of the current tax code, in which the top tax bracket in 2026 is scheduled to go back to almost 40%,” Loyd says.
State taxes, too
There’s also the irksome matter of state taxes on the lottery – a drawback that may or may not exist in the state where you’re collecting winnings. While some states have no taxes on lottery winnings, others have state taxes for top earners that exceed 10%.
But if opting for the annuity, there’s a way around that. “If the winner received the yearly payouts, that person could consider moving to a more tax friendly state to reduce the tax hit,” explains Loyd.
Ultimately, whether you take the lump sum or annuitized payouts, you’ll be beefing up your bank account. And to that end, Loyd – who is also a certified financial planner – will leave you with some parting words. “While the government will certainly want their ‘fair share,’ so will everyone else. Friends, family members, and complete strangers will be extending an open hand for the lottery winner to fill. Learning to say ‘no’ will be a critical skill for any major winner.”
In that sense, winning the lottery – just like doing your taxes – can be a great lesson in both patience and perseverance. If only we could just do the former and not the latter.
