Everyone dreams of winning the big jackpot and having millions and millions to spend. No one dreams of ever running out of the millions or having to pay taxes on their winnings. Unfortunately, both are a reality and happen. If you plan a little and take care, you only have to live through one of those realities – paying taxes. Remember that old saying: “Death and taxes are the only two certainties in life.”
So your dream came true and you now have $5 million! Well, your tax man will be knocking on your door before you even get that check. They want their share before you even get yours. So how much will the tax man want? Good question. Taxes for a win fall like hitting the jackpot of a lottery is calculated by using a percentage.
If you hit it big in the U.S., the IRS will be waiting to collect their share before you collect your first check or payment. In addition to the federal taxes, you will be subject to state and possibly local taxes. The IRS portion will range between 28 and 35% depending on your tax situation. State can be as much as another 10% and local taxes vary greatly. Generally speaking, you can anticipate an average of 40% for taxes. In some cases you will be pleasantly surprised and in other cases it can go a little bit in the favor of the tax man. Federal law requires that the lottery agency report all winnings of more than $600 and to withhold 25% of any claim more than $25,000. This may not cover all of your federal tax liability. You can seek the advice of a tax professional to help you determine how much more you will need to pay for your taxes. Depending on your state, you may or may not have to pay tax there too. Some states like South Dakota do not have a state income tax and therefore you would not pay tax to the state. Some places have local tax and that needs to be covered too. The bottom line is that no matter where you live you will pay some taxes. How much and to whom will be determined by where you live and you should seek the advice of a tax professional so you get the complete story. Finding out later that you owe a large sum of money to the tax people is no fun.
Having a financial planner and a tax professional on your side will help you keep as much money in your pocket as possible. They will not work for free but will save you far more than they charge. Talk to several advisors before you select the one that you think is right for you. It is your money and you should only pay the minimal amount of tax that is required by law. Tax and financial professionals will help you keep as much of it as you possibly can.