Most people, it seems, don't really believe they can win a cash jackpot, lottery or sweepstakes. But when you do win, the realities of coping with a significant cash influx can hit you with a bang. For some winners, a key decision that must be made early on is whether to take the money in a lump sum or in installments over time. Taxes alone can reduce the amount of a lump sum by as much as 35 percent. In addition, if, as for state lotteries, the prize is underwritten by a bond, prevailing interest rates play a role in determining the take-home amount.
Find out what the cash-option value is from the lottery agency or sweepstakes operator. Because lotteries and jackpots are not all funded with the same instrument and because interest rates fluctuate, it is unlikely you can calculate this value for yourself.
Work through the first 1 1/2 pages of Form 1040 to find your taxable income. You'll need income, deduction and exemption data to reach this figure. As of 2012, if you win at least $389,000, whether you have any other income or not, your federal income tax rate will be the top rate. You can skip the calculation.
Get the federal, state and local, if any, personal income tax rates. The Internal Revenue Service will tax your winnings at a higher rate than you may be used to because the winnings will likely push you into a higher tax bracket. Your state and local taxation authorities can fill you in on their rates, whether flat or graduated.
Multiply the cash-option amount by each of the tax rates in succession. Then total the results and deduct that total from the cash-option amount. to arrive at your take-home sum.
- If your winnings are underwritten by a zero-coupon bond, when interest rates are low, your take-home sum will be higher than when rates are at average levels.
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