Every silver lining comes with a cloud, and in the case of winning the lottery, the cloud is tax withholding. While lottery winners should expect the tax man to take his share of the winnings, proper planning and correct withholding made by the prize's granters, prize winners shouldn't have to let tax-situation stress take away from the glow of bringing home a lottery jackpot.
Anyone who wins a lottery prize of more than £3,250 faces an immediate taxation on the prize of 25 per cent. Winners who fail to provide their Social Security number are taxed at 28 per cent of their winnings. This tax is withheld by the lottery commission before it transfers funds to the prize winner, and is reported to the IRS.
Lottery jackpot winners and other winners of large awards may also change tax brackets when they receive a lottery payout. Lottery winnings are reported as "other income" on tax returns, and are likely to raise a winner into a higher income tax bracket. As of 2009 tax tables, taxpayers who earned more than £242,417 are assessed £70,340 plus 35 per cent of the amount above £242,417. In short, lottery winners should expect to owe additional income taxes beyond withholdings taken at the time of winning.
If a lottery winner opts to receive payments in annual instalments, taxes are levied on each payment as they are received, rather than on the prize amount. Because of this, annuitized winnings for smaller state lotteries may face a more favourable tax rate than lump-sum distributions if they are spread over several years.
Future Tax Rates and Annuities
Prizes awarded as an annuity are subject to withholding rates and tax tables of the year in which each award is given. Because of this, taxation on future instalments may come at a significantly different rate if tax laws change.
Winners of large lottery jackpots may choose to invest the bulk of their earnings upon receiving them. Interest that accrues and dividends paid from these investments are also subject to taxes.