9 Things You Might Not Know About Your Lottery Winnings

1. Most U.S. lotteries take out 28 percent from the winnings to pay federal taxes But, if your winnings were in the millions of dollars, you would be paying closer to 39.6 percent (the highest tax bracket) in federal taxes when tax time comes. Add state and local taxes, and you might end up with only half of your winnings when you are done paying taxes.


2. 
   If you opt for the lump sum prize in a $10 million lottery, the prize would be about $5 million. After federal and state taxes, you'd be left with about $2.5 million.



3. Most people take the lump sum because they figure that they can invest the money and do a little bit better than the approximate 5-percent interest that the bonds would earn.



4. In some instances, when a lottery prize is payable in installments, the lottery may purchase a bond or an annuity, and a portion of each annual installment may be designated as interest on the unpaid balance.



5. Many lottery contestants, however, do not give careful consideration to the tax and financial implications of either a lump-sum distribution or annuity. The Tax and Trade Relief Extension Act of 1998 affords some relief in this regard. Newly enacted Section 451(h) provides that a lottery winner may be able to elect (subject to the state's adopting the necessary legislation or regulations), within 60 days after winning the lottery, to receive a lump-sum distribution or an annuity
.


6. 
   Lottery winners who receive the payment of a lottery prize as an annuity may wish to sell the right to receive a future income stream of annuity payments in exchange for a lump sum.
   



7. In the event a lottery winner decides to give a portion of the winnings to another person, the transfer will be subject to gift tax.



8. 
   Winners who are receiving their lottery prize as an annuity should consider some form of liquidity planning to ensure that estate taxes can be paid.
   



9. 
   Companies like Woodbridge Investments LLC can purchase a lottery winner's future installment payments in exchange for a lump sum.