Tax-Free Winnings From the Lottery
Buying tickets for the lottery and combination bets are both common forms of playing the lottery. If you win the lottery, you will receive a check with no tax implications. There are also some ways to ensure that you receive your winnings tax-free. Here are some tips:
Buying lottery tickets
The odds of winning the lottery are against you. That’s especially true if you are on a limited budget. According to a recent Bankrate survey, most adults spend between $1 and $100 per month on scratch offs and Powerball tickets. That’s $17 a week that you can spend on gas or other necessities. So why do so many people spend money on lottery tickets? The simple answer is that it’s a fanciful way to pass the time and ponder “what if?”
In general, buying lottery tickets using a credit card can have several consequences. Most major card issuers consider these purchases to be a cash advance. This means that they will incur high interest rates right away. In addition, you won’t get to enjoy the usual sign-up bonus or purchase rewards from your credit card. It’s also important to keep in mind that some states don’t even allow credit card purchases. You’ll also run into problems if you try to pay with a cash advance card.
Getting tax-free winnings
While you may be happy to win the lottery, you have to know that it is taxable. Depending on the state you live in, you could end up paying as much as 50% of your winnings in taxes. The best option is to report your lottery winnings in the year you receive them, unless you plan on receiving annual installments in a tax-deferred annuity. Depending on the amount of your prize, you might also have to pay state income tax or pay an estimated tax payment to the IRS.
Fortunately, there are several ways to get your lottery winnings tax-free. First, you can give the prize to family and friends. In 2021, you can give them tax-free gifts up to $15,000 per recipient. In 2022, that amount will increase to $16,000 per recipient. In addition to gifting, some types of gifts aren’t taxed over the annual exclusion. You should also consult with a financial professional for tips on protecting your windfall and protecting it for future generations.