From Rags to Riches to Tax Trouble: The Surprising Reality of Winning the Lottery
Jeanne, a lucky resident of Sandusky, Ohio, hit the jackpot in June, winning a staggering $15 million in the state’s 50th Anniversary scratch-off game. The moment she realized her win, she “dropped to the floor” in shock. But as she celebrated with the store clerk, bystanders couldn’t help but wonder what all the fuss was about.
The Taxman Cometh
However, Jeanne’s windfall comes with a hefty price tag. After federal and state taxes, she’ll be left with a mere $4.5 million – a far cry from the headline-making prize. So, what’s behind this massive reduction?
The IRS Takes Its Cut
The Internal Revenue Service requires lottery agencies to withhold 24% of any prize over $5,000. In Jeanne’s case, that means $1.8 million was withheld for federal taxes from her $7.5 million lump sum. But that’s not all – lottery winnings are taxed as ordinary income, pushing Jeanne into the highest federal income tax bracket of 37%. This adds another $2.73 million to her total federal tax liability.
State Taxes Take a Bite
Ohio taxes lottery income at 3.5%, which means Jeanne will owe around $262,000 to the Buckeye State. Her total tax burden? A whopping $3 million, leaving her with just $4.5 million.
The Annuity Option: A Smarter Choice?
Given these eye-watering deductions, one might wonder if Jeanne should have opted for the annuity. By choosing the $600,000 annual payment for 25 years, she would have received the full $15 million over time, with her tax burden spread out over the years. However, tax rates could shift over the next two decades, potentially lightening her tax load.
The Importance of Financial Planning
Many financial experts advocate for the annuity option as it ensures a steady income stream, reducing the risk of quickly burning through a lump sum. Steady payments help prevent financial risks. But as tempting as immediate access to millions might be, experts warn that having a plan in place is essential. Without solid financial advice, it’s easy for winners to blow through their money faster than they think.
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