$US759 million lotto win sound too good to be true? It probably is…

The latest mega-prize win for the US lottery may have Australians salivating at the thought — but here are some salient facts that could turn down the green-with-envy meter.

First of all, a US lottery win of however many millions does NOT mean the lucky winner will walk away with exactly that much loot in their pocket — and this has nothing to do with how many other ticket holders hold the same winning numbers.

In the US, lottery winners must choose between taking winnings in regular “annuity” payments over 29 years, or the alternative of a lump sum but with the total reduced by around 30%. The fact is however that most Americans do want that lump sum, and generally settle for the smaller in-the-hand amount.

But this is even before tax is brought into the picture — because what many Australians may not realise is that winnings from the lottery are taxed in the US. That gambling winnings such as from our local Tattslotto are tax-free in Australia can be a surprise for many visiting US citizens, and may confirm in their minds our status as the lucky country. In the US however, winnings are deemed to be ordinary income, and are taxed accordingly.

What this means for a US citizen with a huge lottery win is that for starters 25% will be withheld for federal taxes (or 28% if you have not provided a social security number). But there can also be state taxes and even local municipal taxes, depending on the location of the winner’s residence.

This mix of state-based taxes is something of a lottery in itself. The withholding tax rate for lottery winnings across the country can vary depending on the state, and starts at 3% in some states but climbs up to almost 9% in others, with a smattering of different rates between these for other states.

If you are going to win the US lottery however, there are few states you’d hope to be living in at the time (although there’s always the federal tax to consider). Texas, Florida, Tennessee and a few other states do not impose individual income tax. And some other states (California and Pennsylvania) exempt lottery winnings from their state income tax. Then again, all these considerations won’t even be a problem if you’re a US citizen living in Alaska, Utah or Alabama, as these states don’t even participate in the lottery.

The US Tax Foundation, an independent tax policy research organisation, estimates that in general terms a theoretical lottery winner, assuming they take a lump sum and smoothing out all the state variables, will end up with a take-home windfall of about 33% of that $US759 million.

And that take-home amount could be even less if our American winner is feeling overly generous. If she shares the prize, and exceeds a lifetime limit of $US5.45 million of cash giveaways, each gift after that of more than $US14,000 per recipient per year triggers a “gift tax” at a flat 40% — levied on the giver, not the recipient. An agreement to share the prize made before the numbers are drawn however renders the shared amounts as personal income in the hands of participants.

$US759 million lotto win sound too good to be true? $US759 million lotto win sound too good to be true? $US759 million lotto win sound too good to be true? $US759 million lotto win sound too good to be true?