Payment of Prizes
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 (cash or lump sum) is a "smaller" amount than the advertised (annuity) jackpot, even before applying any withholdings to which the prize is subject to. While withholdings vary by jurisdiction and how winnings are invested, it is suggested that a winner who chooses lump sum expects to pocket 1/3 of the advertised jackpot at the end of the tax year. Therefore, a winner of a $100,000,000 jackpot who chooses cash can expect $33,333,333 net after filing income tax document(s) for the year in which the jackpot was won.
Lottery annuities often are for a period from 20 to 30 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 are only $25,000, with a balloon payment in the final year. This type of installment payment often is made through investment in government-backed securities. Online lotteries pay the winners through their insurance backup. However, many winners choose lump sum, 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 US, 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.
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