I have been following this very interesting topic for the last few days and have decided to post my comments, actually my first post.
“Under federal tax law, as it existed up until October 1998, lotteries had to be extremely careful about offering winners any choice in how the prize was paid.
Tax law had developed the "constructive receipt" rule: You have to pay income tax this year on money that has been put aside for you, money that you can collect whenever you want, even if you put off being paid until next year.”
Under prior federal law (until October 1998), the tax treatment of lottery winnings paid as installments depended upon when the winner of the prize was permitted to elect to receive the prize as a lump sum payment or an annuity. If the election was required to be made at the time the ticket was purchased, an individual who chose to receive the prize as an annuity was liable for tax in the year when each installment payment was made. If a lump sum payment was chosen, the entire tax liability occurred in the year when the prize was won.
“If the individual has the option of choosing between a lump sum payment and an annuity after the prize has been won, prior federal law required the individual to pay taxes at the time the prize is won, even if the annuity option is chosen. In short, winners given the option of receiving a lump-sum or an annuity had to pay taxes on the lump-sum, even if they chose payments over time.
Congress changed the tax law as part of the appropriations bill for 1999. Their motive was not to help players, but to raise money for Medicare.
Under the new law, the I.R.S. will be able to collect in full for the entire life of the annuity.”
The statute has only a few requirements, which are easy to meet:
- The winner must be given the option of receiving a lump-sum or a "qualified prize;"
- The winner has to decide within 60 days of becoming entitled to the prize;
- A "qualified prize" is a jackpot that is payable over a period of at least ten years.
If all requirements are met, the winner who chooses the "qualified prize" only pays income taxes as the payments are actually received.
This provision is effective for prizes to which the taxpayer first becomes entitled after October 21, 1998. The provision also applies to a prize to which the taxpayer became entitled on or before October 21, 1998, if the option is exercised during the 18-month period beginning on July 1, 1999, and ending on December 31, 2000.