If you’re anything like hundreds of millions of American fortune seekers, you’ve spent at least $10 in the last year on a pack of Mega Millions lottery tickets. Within the last year, there have been over a thousand million dollars in payouts to people who’ve found their lucky stride and hit the jackpot. If you don’t play the lottery, you are probably playing it smart. The chances of winning the lottery are 1 in 175,000,000,000, which means you are more likely to die as a result of being left handed, or killed by a malfunctioning vending machine—yeah, it’s that unlikely.
If you ARE one of the lucky ones who actually strike it rich through the lottery, there are a few things you should consider when dealing with your new found passive income.
Win with the Winnings
Congratulations! You’ve just hit the jackpot and won millions of dollars in passive income. Now that you have more money than you ever thought you’d have you have some decisions to make. No, these decisions do not include how many bedrooms your mansion should have, and the first decisions you make need to include whether you’re going to take the annual stipend or if you’ll take the lump sum (less the taxes and fees). You also have to consider how you’re going to protect your winnings from the dreaded lottery curse. The lottery curse is the curse that hits lottery winners who don’t know anything about financial planning. If you’ve been reading this blog for long enough, you shouldn’t fall into this category.
Before you go spending your money like your wallet’s on fire, you need to sit down with a financial planner and go over your options. You need to put some of your winnings back for investing (so that your money grow), you need to pay off any debt you accrued before winning, and you need to make sure to pay the taxes on your winnings (we cover that in the next section) before you start spending your winnings.
Don’t let the lottery curse drive you to spend recklessly and leave you broke and living in a motor home only a year after your windfall.
Uncle Sam Will Come a Knockin’
The lottery is one of the many ways states make money (take money) from their citizens. A percentage of every dollar you spend on lottery tickets goes to the state, which helps pay for supplemental programs that help provide for state education or to support the elderly.
Not only does the state take a cut of every ticket sold, they also take a percentage of your winnings. The percentage of income taxes on lottery winnings differs by state. If you live in California, Delaware, Florida, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, or Washington, you’re lucky because they do not impose a tax on your winnings. If your state does tax your lottery winnings, it can run anywhere from 3.4% to 10.08%. Picture this—you’ve just won $5 million dollars. If you live in Idaho you will end up handing over $390,000,000 in taxes to the state. Keep in mind that this amount does NOT include Federal Income taxes,which will depend on your income for the year. Chances are that if you win the lottery, you’ll get bumped up several income brackets and end up paying 30% or more in Federal income taxes, which doesn’t seem fair does it?
While winning the lottery is a great way to make a passive income, you need to consider that there are a lot of hassles involved in getting that much money so quickly. Yes, being able to buy all of the things you’ve dreamed of owning must be nice, but you’ll also have to deal with all the odd people who will crawl from the woodwork in order to get their hands on some of their own passive income.
Your chances of winning the lottery are slim, but if you do win, you can live a long and happy life with this unlikely form of passive income.
Have you ever won the lottery? Big or small. Do you know someone who has? What happened?