|Posted: February 6, 2012, 12:47 am - IP Logged|
I'm new here, I'm 19 and have been playing powerball since i was 14 (gotta love the immigrants at the gas stations that dont card for lottery). I was wondering how the tax's work on lottery winnings. I Live in Pennsylvania so theres no state or local tax, the powerball and usa mega site says 25% federal tax on lottery winnings, but i keep hearing i would fall into the 35% tax bracket if i won the 250 million on wednesday night. Is it 25 they take or 35, if its 35 how can they advertise 25? being that I'm only 19 i would probably take the annuity and set it up through a blind trust fund so i dont go blow all the money or have everyone and there brother calling me up, or trying to sue me.
You've filed a tax return in the past and either owed a bit or got a refund, right? Just like it is with an employer, the 25% is only what the state withholds from the payment and sends to the IRS. Withholding 25% is a simple cookie cutter approach designed for much more average incomes. As Uff Da notes, you can reduce your tax obligation (and how much you put in your pocket) by making charitable contributions, but as a practical matter anyone who wins several million will be in the 35% bracket and pay 35% on a good chunk of what they don't give away. On the off chance you were to win you'd want to be talking with an accountant, a lawyer, and an investment advisor long before your tax return is due.
As for cash vs annuity, that's one of the things you'd discuss with your advisors. People far older than you (and perhaps smarter and/or more mature) have blown through impressve amounts of money in a short period. The annuity can make it a bit harder, but plenty of people will offer to buy the annuity and give you cash now, and plenty of people will loan you money to be repaid with those future payments. In the end it's still your self control that determines whether you splurge until it's gone or make it last a lifetime.
There are definitely some advantages to the annuity, but many are personal, and nobody here can make your decision. Reasons against the annuity are more objective, and I'll offer a couple. A couple of states that didn't tax lottery winnings in the past do now, and there's a chance that PA would start taxing your annuity payments sometime before your last payment. If you move to another state that has an income tax they will definitely tax your annuity payment (though that tax may be reduced if PA is also taxing it). Are you positive that you want to live in PA for another 25 years? There's also th ematter of interest rates. Right now they're very low. With the annuity your payments will continue to be based on today's low rates. If you take the cash you may be able to take advantage of higher rates in the future. IMHO, the chance that rates will go up is a major factor in the decision right now.