They Only Took Home About Two-Thirds of the Winnings: The Hidden Lottery Rule That Cost a Winner Big

Imagine the thrill of winning a massive lottery jackpot, only to discover you'll be taking home significantly less than you expected. This was the reality for Ashley Smith from Kentucky, who experienced the rollercoaster of emotions that came with winning, and then partially losing, a substantial lottery prize. Here's a deep dive into Ashley's story, the hidden lottery rule that affected her winnings, and what potential lottery winners need to know.

Key Takeaways

• Ashley Smith won $224,000 in an online lottery game but only took home $160,409 after taxes.
• Lottery winners in the US can choose between a lump sum payment, which is taxed, or annual untaxed payments.
• The majority of lottery winners opt for the lump sum despite the tax implications.
• Financial advisors and legal experts are divided on which payment option is better, with some highlighting the risk of bankruptcy for lump-sum winners.

Ashley Smith's win was supposed to be a joyous occasion, a moment of serendipity during an ordinary night. "I was just waiting for the kids to go to sleep and decided to play," she recalled. The excitement was palpable, with her husband initially thinking her screams of victory were a joke. However, the euphoria was dampened when they realized that opting for a lump sum payment meant bringing home $64,000 less than the total jackpot due to taxes.

The Smith family's decision to accept a lump sum is not unique; about 90% of winners choose this option despite the significant tax hit. This preference might stem from the immediate financial relief or flexibility a large sum provides, especially in cases like Ashley's, where the money was urgently needed following a car accident.

In the US, lottery winners face a crucial decision: receive their winnings as a taxed lump sum or opt for annual untaxed payments over several years. The latter offers a form of financial discipline, ensuring the winner doesn't exhaust their fortune at once. However, this method requires winners to remember to claim their winnings annually during tax season, adding a layer of complexity to their financial planning.

Financial advisors are split on the best course of action. Some advocate for taking the lump sum to invest and potentially grow the amount, despite the taxes. Others suggest the annuity payments offer a safeguard against poor financial decisions, which can be all too common among lottery winners. Andrew Stoltmann, a legal expert, points out the daunting nature of managing a massive windfall, stating, "They then take this massive sum of money and they just don’t really know what to do with that." His observations highlight a stark reality: a third of lottery winners end up bankrupt, unable to handle the sudden influx of wealth.

Ashley Smith's story is a cautionary tale for would-be lottery winners, underscoring the importance of understanding the financial implications of their choices. Whether opting for a lump sum or annual payments, winners must navigate the complex landscape of taxes, financial planning, and the psychological impact of sudden wealth – a challenge that doesn't end when the initial excitement fades.