All lottery prize money is subject to local, state, and federal income taxes just like any other income you may take home during the year. If you jackpot is large, you may be required to make anticipated tax payments to the Internal Revenue Service before the end of the year. This is a common procedure that is more often than not taken care of for you by your employer. If you talk to any small business owner, they can tell you all about quarterly tax payments.

How Much?

Depending on what your monetary situation is, you could pay as much as 50% in taxes on your lottery prize money. That would include state, local, and federal taxes. If you opt to receive your disbursement in installments, you must account for annual payments and any sum marked as interest on the unpaid fraction of installments in income, as received. If you elect to take delivery of the payout as a lump sum, you must include the entire lump sum in income in the year received. By law, if you win $5000 or more in the Michigan Lottery, 28% must be withheld for federal income tax payments.

You're kidding?

Nope. That's right, it's a complex mess when you win a lot of cash from the state lottery. And it gets even worse if you buy the tickets with a group of people and want to hand out the money after the fact. If you're not cautious, you'll get taxed for the initial jackpot, and then the payments as charitable gifts. This is why it's very essential to appropriately form a lottery club if you frequently purchase tickets with a group of people.

Estate Tax on Lottery Winnings

With huge jackpots it gets even more complex, as the disbursement may be over an extended period of time. If a lottery winner were to pass away near the start of that payout period, their estate would be valued at the present value of the sum of all lottery winning payments yet to come. That means, it's likely that your relatives may have to pay a huge sum of estate taxes on lottery winnings that they won't have access to. You can see the difficulty - they may not have the funds to pay the taxes.

Proper Planning

The bottom line is, get acquainted with what you're doing. If you've won a large disbursement, get professional help from an estate planner and tax attorney. The IRS does not acknowledge any excuse when it comes to tax payments, and will have no compassion when prosecuting you to get the funds they believe you owe.