- Cash lotteries are administered by state governments to generate revenue for the state.
- Lottery winners can claim their winnings in a lump sum payment or in annual payments over time.
- Lottery winnings are treated as regular income and subject to state and federal income tax.
In the United States, most states offer some type of cash lottery like Mega Millions or Powerball. When you play, you buy a ticket in hopes of winning a random cash payout.
Although the odds of winning a lottery with cash are very low, Americans still spend billions of dollars each year on tickets. But not everyone considers the tax implications or what they would do with their earnings if they won.
How do lotteries work?
When you play the lottery, you spend a small amount of money for the chance to win a huge prize. Winners are randomly selected. If you choose all the winning numbers, you will win the jackpot or share it with other people who also have all the correct numbers. Most lotteries also include smaller prizes for getting a combination of winning numbers, but not all.
According to Professor Michael Collins, Chartered Financial Analyst and CEO of WinCap Financial, most cash lotteries are run by the government. “Government-administered lotteries are usually run by state governments to generate revenue,” he explains.
Proceeds from lottery funds can be used to fund education, provide treatment for gambling addictions or help protect the environment. However, lottery proceeds represent a small source of revenue for any state.
How do raffles work?
“Consumers buy lottery tickets and the money they spend goes into the winning pot,” says Joel Ohman, CFP® professional and CEO of ExpertInsuranceReviews.com. The longer a lottery lasts without a winner, the more money accumulates in the kitty. When someone wins, the lottery pool starts over.
The winners of the lottery are drawn by lot. For example, Mega Millions draws take place on Tuesdays and Fridays at 11:00 PM EST, and you can watch them on live TV.
In the live draw, five white balls are randomly selected and the balls are numbered from 1 to 70. Then a golden ball is chosen from a set of balls numbered from 1 to 25. If the six selected numbers match your number of lottery ticket, you are the big winner.
What are the odds of winning the lottery?
The chances of winning a lottery jackpot are very low, even if you buy tickets regularly. And there are a lot of variations in the odds depending on the type of lottery you are buying tickets for.
In general, the bigger the lottery, the lower your chances of winning. In the Powerball lottery, for example, players select five numbers from 1 to 69, then choose a number from 1 to 26 for the Powerball. To win the jackpot, you must match all six numbers. With so many possible combinations, the odds of winning are 1 in 292,201,338.
How do lottery payments work?
There are two ways for lottery winners to claim their winnings – as a lump sum payment or in annual payments over time. Both options result in a lottery payout, but there are pros and cons to each.
You will immediately receive your after-tax earnings if you claim a lump sum payment. Choosing this option allows you to start investing and benefit from compound interest immediately.
But if you receive payments over time, commonly known as lottery annuities, the total amount you receive will be closer to the advertised winnings. And annuity payments can protect winners who might be tempted to spend the money all at once.
Lotteries and taxes
According to Collins, the tax implications of winning the lottery vary depending on the type of lottery and the jurisdiction in which it is located.
“For example, in the United States, winnings from government-administered lotteries are subject to federal and state income taxes,” he says.
“Lottery winnings are considered wages by state and federal governments,” Ohman notes. Earning a large sum of money will likely push you into a higher tax bracket, “so not only will you pay higher taxes on your earnings, but you’ll also pay higher taxes on your regular paycheck,” he says. . “The state tax will depend on where you live.”
You can also benefit from a tax deduction if you regularly buy lottery tickets without winning anything. You can deduct losses from lost lottery tickets if you itemize your tax returns.
3 steps to take if you win the lottery
If you regularly buy lottery tickets, have you ever thought about what you would do if you actually won? Assuming you’re lucky enough to win a big jackpot, here are three essential things you should do to protect yourself and your winnings:
1. Protect your lottery ticket
According to Collins, the first thing lottery winners should do is sign the back of the ticket to establish ownership. And you need to take steps to protect your winning ticket: make digital copies and store them in the cloud.
“Then you should keep your ticket in a safe place until you claim your prize,” Collins says. If you lose your winning ticket and do not have a backup copy, you will have no way to claim your winnings.
2. Protect your privacy
Announcing yourself as a lottery winner is never a good idea. You have become a millionaire overnight, and a lot of people will be looking to profit from it. This can include family members, friends, and even strangers.
Seven states allow lottery winners to remain anonymous: Kansas, Maryland, North Dakota, Texas, Ohio and South Carolina. Some states allow lottery winners to form a trust to claim the prize money anonymously.
Others, like California, don’t allow lottery winners to remain anonymous. If you live in one of these states, do not claim your prize immediately. Wait at least a week to get as little media attention as possible.
3. Consult a financial advisor
Finally, Collins and Ohman recommend consulting a financial advisor to make sure you’re making good financial decisions. “If you win big in the lottery, one of the best things you can do is find a reputable financial advisor to help you plan how to make your windfall secure you for life,” says Ohman. .
According to Ohman, most lottery winners spend all of their winnings and end up in worse financial shape than before they won. “It shouldn’t be that way. Winning the lottery can translate into a life of increased comfort and financial freedom through wise investment in a diversified portfolio.”