If you set your sights on winning the lottery, you may find it surprising to realize Uncle Sam is in your corner. Why would Uncle Sam want you to win the lottery? The more cynical amongst us would point to the fact that the Internal Revenue Service (IRS) wants you to win because they can get up to 37 percent of any lottery winnings in tax obligations.

Unfortunately, they would likely be correct. Add in the fact that recent reports have jackpots for Mega Millions and Powerball lotteries at over $2.2 billion and Uncle Sam may be cheering on lottery winners now more than ever before.

Watch out for these tax surprises

It is important to note federal tax obligations are not the only tax surprise that can come with lottery winnings. Two additional factors that can result in tax surprises in these situations include:

  • Timing. The IRS generally does not immediately remove the owed tax from the award winnings. Instead, the tax bill is generally due with other tax obligations — at the end of the tax year. As such, it is best to avoid purchasing luxury yachts or sports cars with the winnings until after you set aside the amount needed to pay your upcoming tax bills.
  • State obligations. Yes “bills” plural. That was not a typo. Although most taxpayers are prepared to handle a federal tax bill, some may be surprised to realize they also have state tax obligations. Not every state requires tax obligations on lottery winnings, but many do. The Minnesota Department of Revenue, for example, requires state residents report and pay obligations on all winnings.

Although these tips can help avoid future issues with tax obligations after winning the lottery, it is not uncommon for taxpayers to find themselves in a tax controversy regarding these winnings. A taxpayer may need to defend against an unnecessary tax bill or penalties. A tax litigation attorney can review the details of the controversy and provide guidance, advocating for your interests during the dispute so you can get out and ride that luxury yacht or sports car into the sunset.