Lottery winners often make headlines for the massive prize money that they clinch thanks to a stroke of luck, but that's not always the amount that they walk home with. The lucky lottery player from New York, who won the $10 million prize in a scratch-off game, had to give up nearly half of the prize money. Sabina Ospino, who won the prize earlier this year in August after purchasing the $30 ticket from a local Deli, opted for a payout as most lottery winners do. But the decision also left her with little more than $6 million after losing the rest to taxes.
Beating the Odds But Losing Money to Taxation
Ospino of Jackson Heights, Queens, won one of the last five of the $10 million prizes of the 200X scratch-off game. She bought the ticket from a deli in Jackson Heights, which also received a bonus on her winnings.
After beating the slim odds of one in 3.5 million, Ospino chose a one-time lump sum payment to collect her prize. This choice ended up costing her dearly as she received only $6,122,400, after the required tax deductions, according to the lottery officials. She had the other option of taking the prize in annuity payments, which would've guaranteed the full amount for her.
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According to The Sun US, 24% of Ospino's winnings were deducted as federal taxes and she had to give up another 10.9% of her prize to pay the New York State taxes and 3.876% for the New York City taxes.
The State Always Wins
As it turns out, taxes on lottery winnings are unavoidable no matter how lucky a winner gets. Before someone can take a penny from their lottery winnings, the IRS usually takes 25% of the prize, according to a report from Smart Asset. Furthermore, up to 13% could be withheld in state and local taxes, depending on where the winner lives. Winners may owe much more than that as the top federal tax rate is a whopping 37%.
To put things into perspective, when the Powerball jackpot ballooned to an estimated $1 billion last year, the winner could only take $516.8 million home as a lump sum payment. This, however, was still the pretax estimate, and the winner had to pay 24% more to the IRS, reducing the prize by another $124 million as per CNBC.
Thus, taking the annuity payments could seem like the better option but the best move for a lottery winner could be hiring a financial advisor to formulate tax saving and investment strategies.
Lump Sum vs Annuity Lottery Payments
According to Javier Simon of the CEPF, the choice depends on the preference and the financial situation of the winner. While financial advisors recommend taking the lump sum, as it allows winners to get a large amount of cash to invest in growth-oriented assets, winners of small jackpots could be better off taking the annuity payment option.
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With a steady stream of cash, winners can still work as usual without drawing much attention. They can prioritize savings for retirement, and open an individual retirement account (IRA) or a Roth IRA. It can also help winners build an emergency fund or a stash for expenses down the road.
