As covered in our blog, “A Guide to Reporting Gambling Winnings…and Losses,” there are unique considerations when it comes to disclosing lottery winnings on your tax return. Given the recent Powerball Jackpot lottery, we felt it might be interesting to talk about the tax implications of lottery winnings, and some best practice tips for the new winners on managing their new wealth.

5 things the winners need to keep in mind

The three new millionaires will have to completely change the way they think about finances, even though it might seem like all their worries, in the financial area at least, have disappeared. Here are some best practice tips for managing lottery winnings:

1. Lottery winnings are taxed the same way regular income is. Depending on where you live, more of lottery winnings go towards taxes—so the winners will want to be aware of how much of that jackpot will actually end up in their pockets. All three winners will be moved to the top tax bracket for both federal (39.6% rate) and state taxes (varies). Certain states like Florida and Texas are non-taxing states, while New York will tax the winnings. Gambling withholdings will also affect the winnings at a rate of up to possibly 25%.
2. There are advantages and disadvantages of taking the lump sum. While it might behoove winners who have outstanding debts especially, to take the lump sum option over the annuity (30 installments over 29 years), there are some drawbacks to this option. The annuity option allows winners to control their spending more so than the lump sum option. Also, with the lump sum option, winners are forced to immediately pay tax on the entire amount. They might end up with less of a tax burden by taking the annuity option, but as the tax rate fluctuates year to year, that might not be the case.
3. They will need to form a financial team before making any decisions on the winnings. Deciding whether or not to take the lump sum or annuity option is something a tax professional or financial advisor can assist lottery winners with. As a winner, if you don’t already have a trusted lawyer or certified public accountant, you will want to make sure you put this team together before you make any decisions on your new wealth.
4. They won’t necessarily have to or want to quit their jobs. The best advice for lottery winners is to be cautious and refrain from making any frivolous or rash decisions. Quitting one’s job is a huge decision and one that can leave you with a lack of drive and motivation, and can separate you from reality in a sense. Before quitting right away, winners might want to take a short leave from their jobs, contact financial advisors, and let the reality of new wealth sink in to allow them to make better informed decisions.
5. They will need to tread with caution when publicly disclosing status as a winner. Posting a status on Facebook disclosing status as a winner is a very risky move. Not only will distant relatives and friends be inclined to reach out to get a share of the winnings, but the winners might be bombarded with requests from local charities and associations. Some states allow winners to remain anonymous, but winners without this option will want to keep as low a profile as possible, and will definitely want to appoint someone to help manage their finances.

Though there are only three winners for the Powerball jackpot, these tips will resonate with any big lottery winners. The most important thing to remember is that a big check provides relief, but also presents new challenges and obstacles, bringing true meaning to the phrase “Money can’t buy happiness”.

Questions? Contact any member of our Tax Services Team.