First, a couple of things you should know. If you plan on claiming a lump sum on the prize, you’ll get about half of what the advertised pot is.  So if the prize is a million dollars, and you take the lump sum, you’ll only get $500,000– that’s not including taxes.

There’s a deadline to being able to claim a lump sum–here in Missouri it’s 60 days, otherwise you’re automatically getting the annuity payments that are spread out over 25 to 30 depending upon which lottery you win.

I’ve actually gotten to help with two different lottery winners, one had a $100,000 win and the other had $1,000,000. Both took their money in lump sum payouts.

Neither was one of my own clients, I was just called in for a consultation, but they were still really fun to work on.

Let’s say you win the Missouri Lotto and will take home a lump sum of one million dollars.  Before you get the cash, the Lotto commission will withhold 25% for your federal taxes and another 4% for your Missouri taxes.  Your take home check will actually be $710,000.

The first thing you need to know is that the actual Missouri tax rate is 6%, so you’re going to want to make an estimated tax payment of another $20,000 before you go spending your money.  Now you’re down to $690,000.

Now on your federal return, you’re bumped up to the 35% tax bracket. You’ll get a deduction for the $60,000 you paid to the state and you’ll get credit for the $250,000 they withheld for federal taxes, but you’ll still owe another $55,000 to the feds when all is said and done.  So now your million dollar windfall is now only worth $635,000. (I’ll still take it, thank you very much.)

Now you’ve got some options here.  Personally, I’d want to take my money, pay my taxes, and have it be mine to do with as I want.  Maybe I give money to the relatives, maybe not.  My decision.  But I have a friend who knows that if he wins, it gets split 10 ways among family members.  He’s got a choice to make.

He can claim his ticket, pay the taxes, and then gift each of his other family members $63,500.  He wouldn’t actually owe gift tax on that money, but he would be required to file gift tax paperwork which would cost him something there.

Or, he could present the ticket as a group winner–with each of the family members being able to claim $100,000 in winnings.  And, each member could also chose the annuity option if they desired (which would double the payout.)  Because he knows this is what he’s going to do–it makes a lot of sense–the $100,000 win keeps him in the 25% tax bracket which saves the group $55,000 right off the top.  It also keeps him from preparing gift tax returns too (which is just kind of annoying.)

So what about the annuity payout option?  That would be $2 million dollars paid out over 25 years. (Remember, if you take the lump sum it’s half of the total so your million dollar lump sum example was a $2 million dollar win.)  This works out to a cool $80,000 a year.

The Lotto agency would still withhold 25% federal taxes and 4% state taxes leaving you with a take home check of $56,800 a year for 25 years.  You’d still want to pay Missouri an extra $1100 to cover your taxes, but your federal withholding should be sufficient.   Using this option, after 25 years you would have received $1,392,500 free and clear.  Sweet.

No matter whether you take the cash now or later, make sure you prepare for the taxes that go with it before you spend all your money and you’ll come out a winner.  Good luck!