We Wish Complaining about Taxes Were Tax-Deductible
Winning the lottery jackpot is all about a bit of luck and… good financial management. That’s right, even if you haven’t won that impressive sum yet, you need to have at least some idea about what you’re going to do when you get your hands on the cash.
Regardless of the country that you live in, chances are that you’ll be subjected to at least some form of taxation. The lucky individuals that are citizens of countries having a tax-free regime for lottery prizes aren’t that many. We know that dealing with laws is anything but sexy and exciting. Yet, this is one of the steps that you’ll have to undertake in order to enjoy your money.
So, whether you’ve already won or you’re about to, here are the LottoExposed top 6 tax strategies for lottery winners.
Take Some Time before Making a Financial Decision
This is one of the most important pieces of tax advice that the overwhelming majority of lottery winners will ignore.
When you win a large sum of money, you become incapable of making rational financial decisions. You’re emotional and you feel the urge to spend. This is the main reason why you’re likely to do something stupid.
Give yourself some time to celebrate and come back to your senses before deciding on anything. Once the initial emotions subside, you can consult a professional to find out more about the taxes and the investment opportunities that you can benefit from.
Choose the Right Payment Type
This tip is valid for US lotteries and some of the biggest games from other parts of the world. Jackpot winners are given an opportunity – they can pick between annuity payments or receiving the jackpot in the form of a lump sum.
Though getting a lump sum may seem a much more attractive option because it enables you to buy that Ferrari and your first yacht right now, the option is usually more disadvantageous than annuity payments.
In the case of annuity payments, the company operating the lottery will be investing the money that still hasn’t been handed out to the winner on their behalf. This financial management allows for the maintenance of a high amount that the winner will eventually get.
A lump sum will be taxed in its entirety the moment it gets received. The applicable tax is for the year during which the money was won. With annuity payments, the taxation is gradual and less pronounced. Most financial professionals and accountants recommend the annuity payment as a way to get more money and reduce the large sum that would otherwise have to be dedicated to tax payment.
Invest the Money to Reduce Your Taxes
We know that spending the cash immediately seems one of the most attractive options, but it doesn’t make a lot of financial sense in the long run. Instead of making impulsive purchases, you can attempt something a bit more meaningful – investing the money.
By making certain types of investment, you can also reduce the taxes that you’ll otherwise have to pay.
If you live in the US, for example, buying commercial property with your lottery prize is a really profitable thing to do. The money generated through sales or rent is categorized as capital gains. There’s a specialized capital gains tax rate that is lower than the standard tax applying to lottery prizes.
Talking to an accountant or an investment consultant immediately after you’ve won will help you come up with a strategy. This way, you’ll reduce taxes and you’ll also potentially maximize the prize through smart investment.
Pay Taxes in a Timely Manner
People that win smaller amounts are often tempted to ignore their social responsibilities and refrain from paying taxes. Though the strategy may seem like a good one in the short run, it can backfire dangerously in the future.
Pay taxes immediately if you don’t want the sum, the interest rate and the penalties to grow.
Tax authorities in most countries do random inspections. It’s not that likely you’ll be subjected to one, but if you are, you’ll still have to pay the income tax and a fine. Thus, attempting to play it clever and avoid taxation will have you spending a much larger amount in the years to come.
Donate to Charities
This is another pretty common strategy that enables lottery winners to minimize the amount they’ll have to pay in taxes. If you choose this option, you’ll once again have to talk to an accountant. Together, you can calculate the optimal donation and the size of the tax deduction that it’s going to produce.
Both charitable gifts and donations will qualify you for a gift tax deduction in the US. Many other countries, especially EU member states, have similar regulations. There are some exclusions in terms of organizations and individuals that you can donate to in order to enjoy a tax discount. This is why an accountant can help you choose the right charities, feel good about what you’re doing and save some money that you’ll otherwise have to dedicate to taxes.
Estate Planning and Taxation
This final one isn’t an immediate concern, but something that you should tackle sooner or later.
Once you come into possession of a large sum of money, it would be smart to think about who’s going to inherit the amount in the eventual case of death. In such instances, you should be prepared to deal with estate taxation.
According to US laws, each person has a 5.45-million dollar limit on tax-free money transfers. The money can be transferred to family members during your lifetime or after your death. The limit was increased in 2016, making the year a good one for estate planning and avoiding unnecessary taxation on lottery prizes.
As long as you work with the right professional team and you’re willing to make responsible rather than impulsive decisions, you’ll benefit from tax minimization opportunities. Do a bit of research and hire at least one experienced accountant and one investment consultant. This professional team will help you manage your money in the best possible way, enjoying the lottery prize in the years to come.