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Posted by Pat Raskob

A Guide to Taxes on Lottery Winnings

A Guide to Taxes on Lottery Winnings

Whenever you see a dollar from a lottery win, please remember that the IRS has taken its 25%. Up to 13% can be withheld in local and state taxes (depending on where you live). However, you will still owe a significant amount of taxes because the top federal tax rate is 37%. Therefore, the best first move every lottery winner should make is getting a financial advisor right after winning. 

The financial advisor will help the winner with investment and tax strategies, enabling the winner to maximize the win. So the big question is this: how does the government tax lottery winnings?

How lottery winnings are taxed

According to the IRS, all lottery winnings are classified as “Ordinary taxable income.” After the winner subtracts his cost, he will be owing to the IRS federal income taxes on whatever remains. The exact amount depends on the winner’s tax bracket, which is determined by his winnings and other sources of income. The IRS holds on to 25%, while the winner owes the rest when he files his taxes in April.


Lottery winnings are taxed by states. 

States want a piece of the action hence the reason why they also tax the lottery winners. The extent of the amount will be determined by where the winner lives. For instance, New York has the most significant share with 13%, and this is mainly because New York is home to very high-income tax, which can be as high as 8.82%. 

Additionally, New York’s city levels are at 3.876%, with Yonkers taxes at a lean 1.477. If you live anywhere else, but in New York, you will be paying 8.82% in top and statement.

Within all the states with income taxes, the rates can go from 2.9% to 8.82%, but nine states do not levy the state income tax, and they include: 

  • New Hampshire

  • South Dakota

  • Wyoming 

  • Texas

  • Florida 

  • Washington 

  • Alaska 

  • Tennessee 

If you live in a state and purchase lottery tickets in another state, the state where the ticket was obtained and the lottery prize to be paid will withhold taxes at its rate. You will also have to sort out the amount of money you owe the state when tax time. You will get a credit for the withheld amount, with both states arranging who gets the stipulated percentages.

These are examples that display the possible outcome of getting all winnings as a hefty sum. While in most cases, you have the option of taking your earnings through monthly payments.

How to decrease tax burden after winning the lottery

The taxes on lottery winnings are inescapable, but there are ways of minimizing the sudden tax hit. If your lottery reward is small, you can take the winnings through installments, which can run through for up to 30 years. With this, you will be reducing your tax liability which keeps you in the lower tax bracket.

It is possible to donate to a non-profit organization that enables you to maximize some itemized deductions, which could bring you into a lesser tax bracket. If you are sharing your winnings with friends and family, you want to ensure that you don’t get to pay gift taxes as well. 

Winning a large sum of money at the lottery is a fantastic life experience, but it can also be a life-changing process as the decisions you make afterward can either leave you feeling richer or broke. 

Again, you must work closely with a professional financial advisor who will help you learn how to preserve and boost the money you won. After all, you don’t want to lose it all to lousy tax decisions.



Pat Raskob
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