From tax standpoint, you are actually lowering your tax burden says Rick Bloom, an attorney and certified public accountant.

While discussing the fact that a lottery winner's take of a $180 million jackpot was reduced to $60 million by taxes, Rick Bloom and friends analyzed the following question:

Question:
Would it be best to take a lump sum payment or take it over a long term?
As I see it, said Mr. Bloom, the benefit of taking cash is the opportunity to invest for oneself, potentially to increase the wealth further during the 20 years or so it would take to get installments. On the other hand, getting a certain amount over a long period would lessen the risk of poor management, throwing the money away on a risky venture for example. Also, it may give one the chance to lessen the tax burden by sheltering the money as it comes in over the long haul.
So what should I tell the cashier when I buy my ticket, cash or annuity?

Answer.
All things being equal, my general rule is to take the cash.
The first issue to address is taxes. Whether you take a lump sum or the distribution spread out over a number of years, the money is still going to be taxed at the highest tax bracket. At this time that is 39.5 percent. By investing the money yourself, you have the opportunity to invest in growth funds that would be subject to capital gains tax, which is at the present time 20 percent. So all future appreciation would be taxed at 20 percent as opposed to the 39.5 percent, which is a considerable savings.
From a pure tax standpoint, you are actually lowering your tax burden in the long run by taking the money up front, since you can receive capital gain treatment and be able to choose to invest some money tax-free.
The other issue deals with poor management of money. I imagine lottery winners are swamped with people who are trying to sell them everything and anything under the sun. A lottery winner has a risk of running into unscrupulous characters. To avoid problems, my advice is to deal with a financial adviser who does not charge commissions and works solely on fees. By doing this, winners have a better chance of protecting themselves.
Don't assume that if they take payments over time they would lessen the possibility of mismanaging that money. There is a history of lottery winners who received staggered payments, and because of mismanagement, not they but their creditors saw those payments.
Whether someone wins the lottery or receives an unexpected windfall, the key is always to take a step back and make decisions based upon individual goals and objectives, and to be very cautious as to whom they trust.


Courtesy of LottoBuster.Com