In a stroke of unbelievable fortune, Jeanne, a Sandusky, Ohio resident, won $15 million in the state’s 50th Anniversary scratch-off game this past June.
Describe when Jeanne told the Ohio Lottery Commission that she had “dropped to the floor” after realizing her win. At the store, the clerk and Jeanne had cried together, leaving bystanders wondering what on earth had just happened.
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While $15 million might seem like a life-altering sum, Jeanne's final payout will be much less due to taxes, leaving her with around $4.5 million. It's a classic example of a lottery winner facing a significant reduction in winnings after taxes – an issue many winners don't see coming.
Jeanne had the option of receiving $600,000 annually over 25 years (which totals the advertised $15 million) or a lump sum of around $7.5 million. She chose the lump sum. According to Moneywise, Jeanne will be left with around $4.5 million after paying federal and state taxes, a far cry from the headline-making prize.
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So, why is there such a huge difference between the $15 million jackpot and her final earnings?
The IRS requires lottery agencies to withhold 24% of any prize over $5,000. For Jeanne, that meant $1.8 million was withheld for federal taxes from her $7.5 million lump sum. But the story doesn't end there.
Since lottery winnings are taxed as ordinary income, Jeanne's windfall pushes her into the highest federal income tax bracket of 37%. This means her total federal tax liability rises to approximately $2.73 million, Moneywise reported.
State taxes also take a bite out of Jeanne's winnings. Ohio taxes lottery income at 3.5%, which means Jeanne will owe around $262,000 to the Buckeye State. Jeanne's total tax burden is nearly $3 million, leaving her with just $4.5 million. It’s not bad for a $50 scratch-off, but far from the $15 million advertised.
Given these eye-watering deductions, one might wonder if Jeanne should have opted for the annuity. Would she have taken home more money in the long run?
By choosing the $600,000 annual payment for 25 years, Jeanne would receive the full $15 million over time. Her tax burden would be spread out and she'd pay yearly taxes based on her income.
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In 2024, that means she'd owe roughly $180,000 in federal taxes and $20,000 in state taxes on the first $600,000 installment, according to current tax brackets. However, tax rates could shift over the next two decades, potentially lightening her tax load if Ohio's proposed income tax elimination passes.
Many financial experts advocate for the annuity option as it ensures a steady income stream. According to certified financial planner Michael Kitces, annuities can reduce the risk of quickly burning through a lump sum. Steady payments help prevent financial risks.
That said, the lump sum offers immediate financial freedom, likely why Jeanne chose it. Many winners use lump sums to pay off debts, buy homes or invest in growth opportunities.
But as tempting as immediate access to millions might be, experts warn that having a plan in place is essential. Without solid financial advice, it's easy for winners to blow through their money faster than they think.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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