How Lottery Payments Are Released

2007-03-08 10:33:40

( Financial )



In the US, when a person wins a large amount of money from playing the lottery, it is expected that the advertised prize money will be given out to the winner without any deductions. What most individuals do not know, and are surprised to find out is that there are certain taxes that are deducted from the amount that is won before the lottery payment winnings are released to the winner.

Lottery payments are received in two ways:

Lottery payments can come in the form of periodic payments in the form of annuities, whose gross amount is paid out anywhere between 10 to 40 years. Lottery payments are subject to federal income taxes, which can be up to a third of the gross amount received. Lottery payments are also subject to additional taxes when you file your annual income tax return; however, this is dependent on your overall income for each year.

Some periodic payments are paid out equally over a certain number of years with a larger amount paid out in the final year of payment (also known as a balloon payment).

Lottery payments can also be paid out as a lump sum amount; however, not all states offer this option. The lump sum amount is usually around half of the advertised winning amount before deducting any federal income taxes which sometimes end up being an even smaller amount than if you choose a periodic payment scheme.

Receiving a lottery payment in the form of a lump sum amount will allow the immediate deduction of all federal and income taxes, rather than experiencing the inconvenience of having to pay annual taxes spread out over a course of a number of years. Some lottery winners choose cash payment in order to immediately settle some or all of their debts despite the smaller amount that can be received. A cash payment is also chosen in order to fight the depreciating value of the dollar, wherein the cost of daily living rise each year, so that the value of your money today becomes less in the coming years.

People who are very surprised to learn about the net amount of lottery payments that are received can also choose to approach certain financing companies. These financing companies can buy your lottery payments and convert it into a tax free loan, or offer you other financing options, so that you no longer become subject to paying most of the taxes that are due on your lottery payment. It is the job of these financing companies is to take care of all the legal and administrative paperwork that are necessary in order to execute the fund conversion.


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