Why paying taxes on lottery winnings is a small price to play?

People across the country enjoy playing the lottery. Powerball or Mega Millions tickets when jackpots reach hundreds of millions or scratch-off tickets from the local gas station are all enticing if you can win big. And while we all dream of holding that giant winner’s check one day, there’s one unavoidable consequence of winning the lottery that puts a slight damper on things – taxes. Paying taxes on lottery winnings is inevitable, but it’s a relatively small downside that shouldn’t dissuade people from playing.

Taxes on winnings are mandatory

Let’s begin with the fact that lottery winnings are taxed by law. Upon receiving lottery winnings, the IRS classifies them as “gambling winnings”. Your winnings must be reported and taxed, regardless of their size. Failure to comply with this can result in a criminal tax evasion charge. Lottery winnings generally cost 25-40% of your income, depending on your state of residence. Lottery winners are exempt from state taxes in California. Whatever your income or where you live, the federal tax is inescapable. If you need more details, click here

You still walk away with life-changing money 

Now that we’ve established taxes on winnings are compulsory, let’s get to the heart of why they aren’t so bad. Simply put, you still walk away with incredible life-changing cash even after taxes. Let’s break down some examples:

  • A $1 million scratch card prize – After 40% in taxes, you still net $600,000. Enough to pay off debts, invest, and make upgrades to your lifestyle.
  • A $50 million Powerball jackpot – The 24% federal tax takes $12 million off the top, but you still have $38 million left over – more than you could spend in a lifetime.
  • A $300 million Mega Millions jackpot – Roughly $100 million goes to taxes when all is said and done. But $200 million affords you access most people only dream of.

While seven or eight-figure tax bills certainly sting, when the pre-tax amount is so massive, you still have incredible wealth left over. You realise almost any dream or ambition even with a chunk going to Uncle Sam.

Top tax rate used to be even higher

Looking back historically is another helpful perspective. Compared to past tax rates, the top income bracket pays just 37% today. Nearly twice what it is today, the top tax rate was 70% in the 1970s. Today’s winners not only receive life-changing money but also benefit from historically lower taxes on winnings. A winner of a $100 million jackpot in 1975 would have paid $70 million in federal tax alone, leaving them with only $30 million. Compared to the roughly $37 million after-tax a winner today would net the same prize – an extra $7 million in take-home money. Of course, no one likes handing money over to the government. But given the facts, today’s lottery winners are still left with incredible sums even after tax. Being forced to cut a check at tax time is a small tradeoff to having financial freedom for the rest of your life.

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