Winning the lottery sounds like a dream come true, but it’s a big responsibility that can
result in numerous tax and financial difficulties if the prize money isn’t properly managed.
Here are four things you need to think about if you win:
- Choosing the right payment option: If you win a large jackpot, you can choose
between getting a single, lump-sum payment or taking an annuity. The lump sum
significantly reduces your overall winnings whereas the payment or annuity option
will offer ongoing annual payments that net you the entire winnings. The option you
choose can also affect your legacy and potential estate tax.
- Evaluating all the tax consequences: The amount of taxes you pay on your winnings
will depend on the way you choose to have them paid out. Taxes on a lump sum are
based on your income that year, which will include the lump-sum payout. Taxes on
the annuity payments are based on the amount you get each year, which could mean
you pay less in taxes on this option.
- Being aware of the pitfalls: While taking the lump-sum option allows you to invest
the funds and possibly grow them, it also increases the risk that you will lose money
on risky investments or overspending—and yes, even if you win hundreds of
millions of dollars, it’s totally possible to overspend and end up in debt or even
facing potential bankruptcy.
- Getting the right advice: Before claiming your winnings, it’s important to consult
with a team of tax and financial advisors as well as lawyers. If possible, assemble a
team of professionals who have experience guiding other lottery winners since
they’ll understand some of the unique pitfalls associated with winning.
It’s understandable to get excited when you see your numbers pop up on the television
screen during a lottery drawing, but it’s important not to take rash actions while in a state
of excitement. Instead, let yourself calm down and get expert advice before you determine
the best approach to take in claiming and spending your winnings.