The government takes 20 percent of your lottery earnings

Dear Matthew Alice: Sitting around daydreaming about the California Lottery. Some of us think the 20 percent that they take off the top is just withholding tax and the big winners will eventually pay higher taxes, considering that the top rates are much higher than 20 percent. Do people have to pay more once the dust settles? Second is state income tax; most of us think there is no state income tax. And if the winner wins ten million, is the money put into an annuity so they can be assured they'll receive it, in case the lottery went belly up? And here’s the big question. Help quick and prevent a fistfight. One of our group insists that if you win and claim the prize and die the next year, your heirs get nothing of the 19 yearly payouts still due. Can that be? She says a claimant would have to set up a trust or corporation or something prior to making a claim to avoid this. Oh, no. Please don’t say we have to share it with a lawyer. Who runs the lottery anyway, and why does it seem so secret? — Pete H., San Diego

With that first annual payment on your millions. Fete, I’d invest in a few obedience classes for the old computer. But at least it’s refreshing to get a Lotto question that doesn’t propose some cockamamie scheme that’s guaranteed to outwit the laws of nature and statistics and produce a can’t-fail winning Lotto number. I think all the brainpower being applied to outsmarting Lotto is beginning to contribute to global warming.

Let me apparently be the first to tell you that as of January 1 this year, the feds skim 28 percent, not 20 percent off the top. But yes, this is just withholding. When tax time rolls around, you very well might owe them more, depending on how clever your accountant is. This withholding applies to all Lottery prizes of $5000 or more, though the California Lottery Commission is required to report to the feds all prizes of $600 or more, which means the winners are too (federal tax form W-2G). There’s no state income tax on lottery winnings. By the way, the feds get 31 percent in withholding dollars from winners who are resident aliens and do not provide a Social Security number.

Your 20-year payments on your Lotto millions will come from an annuity fund invested in zero coupon Treasury bonds. At last count, California is paying 1050 millionaires, the largest annual payment being $1,812 million (on a jackpot of $45.3 million). And no, your heirs and assigns can’t get their grubby fists on the money unless you set up a revocable trust declaration. You’re disappointed? You should have known that’s too much money not to involve a lawyer in the process somewhere along the line.