Winnings (in the U.S.) are not necessarily paid out in a lump sum, contrary to the expectation of many lottery participants. In certain countries, mainly the U.S., the winner gets to choose between an annuity payment and a one-time payment. The one-time payment is much smaller than, indeed often only half of, the advertised lottery jackpot, even before applying any withholdings to which the prize may be subject.
While taxes vary by state and how on winnings are invested, a rough rule of thumb is that a winner who takes a lump sum can reasonably expect to pocket 1/3 of the jackpot amount after the initial tax withholding and additional taxes at the end of the tax year. Therefore, a winner of a $100,000,000 jackpot who takes a lump sum can roughly expect to have $33,000,000 after filing income tax documents for the year in which the jackpot was won.
The annuity option provides regular payments over a period that ranges from 10 to 40 years. Some U.S. lottery games, especially those offering a “lifetime” prize, do not offer a lump-sum option.
In some online lotteries, the annual payments can be as little as $25,000 over 40 years, with a balloon payment in the final year. This type of installment payment is often made through investment in government-backed securities. Online lotteries pay the winners through their insurance backup. However, many winners choose to take the lump-sum payment, since they believe they can get a better rate of return on their investment elsewhere.
In some countries, lottery winnings are not subject to personal income tax, so there are no tax consequences to consider in choosing a payment option. In Canada, Australia, Germany, Ireland, Italy and the United Kingdom all prizes are immediately paid out as one lump sum, tax-free to the winner. In Liechtenstein, all winnings are tax-free and the winner may opt to receive a lump sum or an annuity with regard to the Jackpot prizes.
In the United States, federal courts have consistently held that lump sum payments received from third parties in exchange for the rights to lottery annuities are not capital assets for tax purpose. Rather, the lump sum is subject to ordinary income tax treatment.
EXTRA:
Believe it or not, there can be some problems associated with winning a lottery jackpot. There are security and safety risks associated with publicly announcing the lottery winners such as holding family members for ransom. In addition, Winners sometimes feel anomie from the dramatic change of lifestyles.