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What to Know About Lottery Winnings

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.

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