March 2, 2021
money pile

Winning the lottery is a dream come true for most Americans so it may come as a shock to many that lottery winners may face tax implications when filing their taxes. Here are some tax tips individuals should be aware of if they have won the lottery.

Consult with a tax professional. The first thing you should do after winning the lottery is to reach out to a tax professional to discuss any tax problems on both a state and federal level you may have to deal with down the road. A tax professional can help a taxpayer make the right tax choices in advance in order to avoid any tax time surprises.

Understand how your lottery winnings are taxed by your state. When tax time comes around, individuals who won the lotto need to be aware of what to expect when it comes to owing state taxes. Income tax differs per state and can span from about 2.9% to 8.82%. There are nine states that don’t levy state income tax:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Decide what to do with the money you won. Depending on where a taxpayer lives, it may take some time before the money is actually received. Taxpayers will have to decide whether they want to take a lump sum or 30 annuity payments over 29 years.

Although most individuals would prefer to take the lump sum of cash, they will have to pay on the entire tax amount right away. Those who prefer annuity payments, will only be taxed on the amount that they are receiving.

Invest in a team of financial and legal advisors. Regardless of how you choose to take your winnings, you will most likely be placed in the highest tax bracket. Having a team of accountants and investment advisors behind you can help you make the best financial decisions.

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
  • 37% on any amount more than $510,300

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.