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Winning the lottery may seem like a dream come true, but many winners face a rude awakening when they learn that lottery winnings are usually subject to taxes. Lottery winnings are generally considered income for the year of the win, and may be subject to state, regional, and federal taxes. If a large win occurs, many experts recommend hiring an accountant immediately to help figure out the tax rate on the winnings. In some cases, failure to properly account for taxes on lottery winnings can drive the lucky winner into an endless spiral of debt.
Taxation may depend on whether the winner chooses to receive a lump sum payment or annual installments. Annual installments are usually available for very large wins, such as those over $1 million US Dollars (USD). In a lump sum winning, the winner will generally have to claim the entire amount as income using a special tax form for lottery and gambling winnings. With annual installments, the amount received each year will be subject to annual taxes.
State or regional tax levels on lottery winnings vary between jurisdictions. In some regions, these taxes can be up to 50% of the total amount of the payout, while in others, there may be no state tax for winnings. It is very important to immediately consult state tax information as soon as a win occurs, in order to find out the applicable tax rates. Taxes are usually assessed by the state in which the winner files, not the state in which the win occurred.
Federal taxes may be immediately withheld from the winning payout. In the United States, federal tax rates for lottery winnings are 28%, but may be higher if the winner is in a higher paying tax bracket. Many other countries, such as Canada, the United Kingdom, and Liechtenstein, do not tax lottery winnings at all and present the entire sum to winners in a single lump payment.
Other issues to consider regarding taxation on lottery winnings include division of winnings. Some people play the lottery in groups, with all contributing money for tickets in exchange for a share of any winnings. If one person buys the tickets, however, he or she could end up assigned responsibility for all taxes unless it is established that the contract to divide winnings and tax responsibility existed before the win. Tax issues can also come into play should a winner get divorced while annual payments for a win are ongoing; unless it is specified in the divorce contract, the winner may be responsible for all the taxes on annual payouts, even if he or she has to divide the pre-tax income with an ex-spouse.
Fascinating how even winnings from public sponsored, statewide lotteries can be taxed, isn't it? One has to ask the question -- how many times can the government tax the same dollar as it floats through the economy?
Frankly, public lotteries ought to be tax free. Lottery proceeds are, essentially, treated like a tax because they finance things that taxes traditionally pay for so it seems logical to let the money that escapes the system fall fully into the hands of those lucky enough to win it.
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