Whether you win 1.3 billion dollars on the next Power Ball drawing or a minute couple million in another lottery, the biggest question you’ll be facing is whether to take the lump-sum or annual annuity payments. Both are taxable income, and in the end the taxes you pay will have more to do with the amount you’ve won and your annual income to begin with, but the two different payment options have slightly different tax implications.

Federal Taxes with Lump-Sum Payment

If you choose to take the lump-sum payment, your winnings will be taxed all at once. Depending on the jackpot and your annual income, the tax rate may be as high as 39.6%. Your filing status will determine tax liability.

Federal Taxes with Annuity Payments

Choosing the annuity payments will not result in any immediate taxes on the total winnings. Instead, you will be taxed on whatever amount you take in per payment. In a sense, you’ll be paying less in taxes per payment than you would taking the lump sum, but this also means you’ll have high tax rates levied against your income every year for as long as you receive the payments.

State Taxes

Unless you’re a resident of Alaska, Florida, Texas, Nevada, South Dakota, Washington or Wyoming, you’ll have to pay state taxes on your lottery winnings. The rest of the states have their own income tax, as do many local governments. These entities could easily skim another 10 percent off your lottery winnings. If you live in Delaware, for example, assuming your winnings and income surpass $60,000 will be subject to a tax rate of 6.60%.

Minimizing Tax Liability

The best way to minimize tax liability is to, believe it or not, give away some of the money to lessen the taxable income. Donating to your favorite charities, giving small monetary gifts (under $14,000), or putting your winnings into a trust can all help diminish your taxable income. With that being said, depending on the amount you won, it may be impossible to avoid the higher tax bracket and giving Uncle Sam his share.

Author: Tyler Nolan, freelance writer. Twitter: @T_Nol_