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What taxes are involved with a lump sum cash payment?

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Quick Answer

A lump sum pension payment received by an individual is subject to current federal and state income taxes on all pre-tax contributions and earnings deposited into the account, according to New York Life. As of 2015, the federal income withholding tax is 20 percent of the eligible pension funds. Funds distributed to individuals before they reach the age of 59 1/2 are subject to a 10 percent tax penalty unless there are extenuating circumstances, such as disability.

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Full Answer

However, the IRS does not immediately assess taxes for a lump sum payment deposited into an IRA, states Bankrate. Instead, the IRS taxes money withdrawn from the IRA account depending on the amount withdrawn. The IRS requires individuals to withdraw a certain amount from the IRA account and pay taxes on the withdrawn amount once the account holder turns 70 1/2.

Lump sum payments received as part of a lottery jackpot are also subject to federal and state income taxes, as Zacks Finance explains. State income withholding taxes vary by state, ranging from 0 percent in states with no income tax to 10.8 percent, as of 2015. The federal income withholding tax is 25 percent of the winnings. The IRS considers lottery winnings as ordinary income and taxes them in same year that they are distributed to taxpayers.

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