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Do you owe the IRS if you win the lottery?

| Jun 18, 2020 | Tax Law

It was a big payday for a lottery ticket buyer from Arizona. The patron entered a local store, purchased a Mega Millions ticket, and left to soon become a millionaire. Later that evening, the ticket holder won the $410 million jackpot.

The winner will not, unfortunately, get the entire sum. First, Uncle Sam gets a cut.

How much does Uncle Sam get from the lottery winnings?

The answer depends on a number of factors, including where the winner lives as state taxes may also apply. Generally, whether the ticket holder takes the winnings a lump sum, cash payout or an annuity, they will owe the Internal Revenue Service (IRS) 24% of the winnings. In this case, this translates to a tax bill of about $76,000.

There are additional tax consequences. The winnings will likely result in a change to the winner’s tax bracket. This means they will now likely have to pay a higher percentage of their income to the IRS. The ticket holder will also need to account for the proceeds of the winnings as income on their income tax returns. This will lead to another tax bill.

Taxpayers can reduce the bill that results from lottery winnings with tax planning strategies. One example involves setting up a charitable foundation or donations to other charitable organizations.

Even after paying off these bills, the winner will still experience a significant windfall. As a result, it is a good idea to bring in a team of professionals to help navigate the impact of the funds and better ensure they are used wisely—so they do not disappear as quickly as they appeared.