Posted by McCool's Tax Service

Lottery Winnings: Do I have to Pay Taxes?

Lottery Winnings: Do I have to Pay Taxes?

According to Uncle Sam, all lottery winnings are classified as gambling winning, which is taxed at the ordinary income tax rate. The entire tax amount you will pay on lottery winnings depends on many things like:

  • Your state of residence

  • How you took the winnings – lump sum payment or annuity

Bear in mind that Uncle Sam wants a cut of your lottery winnings. However, the good news is that claiming some forms of deductions might be able to reduce your taxes. As a result, this article sheds light on everything you need to know about paying tax on your lottery winnings. 

Everyone should note that the tax rules vary for state and local governments. This article, however, focuses on the federal tax implications of lottery winnings. 

Will I pay Tax on Lottery Winnings?

Uncle Sam believes that many income types can be taxed unless it specifically says no. This explains why the IRS wants a share of lottery winnings since they classify it as gambling winnings, which is a taxable income. 

Lottery winnings can be taxed in either of these two ways:

  • The payment of tax will be on the entire winnings the same year you got the payment. This is winnings paid as a lump sum.

  • Payment of taxes on the amount you get every year.

Even if you get interest paid on annuity installments, which you are yet to collect, you need to include the interest with the gross income for the year you got the payment.

How Does Uncle Sam Know about Lottery Winnings?

For people whose winnings are above 600 USD, the lottery agency will supply you Form W-2G that you will fill with your federal income tax return. This happens provided the lottery firm withholds the federal income tax portion from your income. 

The lottery firm will also send Uncle Sam a copy of the form provided you won $600 or above. However, you should not wait to get a W 2G form to report your tax return's winnings.

How will My Overall Tax be Affected By Winning the Lottery?

Yes, your life will change if you get a huge win but never be so carried away that you will forget Uncle Sam's cut. Sadly, the amount of money that ends up with you can ultimately reduce, making it essential to understand the implications of taxes on your winnings when you hit the jackpot. 

Whatever mode you chose to receive the winnings – lump-sum payment or distributed payments, the experience will generally boost your income. The calculation of taxes is a factor of your taxable income in the year, and with extra income coming from the lottery income, it shoots you to a higher income bracket. 

Not reporting your taxable income, which includes lottery winnings on your return, might translate into you owing extra taxes alongside interest and penalties. 

Estimating Tax Rate on Lottery Winnings 

Depending on your location, one might need to pay local and state tax on lottery winnings in addition to the federal tax.

Federal Tax

All lottery firms must withhold 24% from people who won $5000 and above for the federal government. However, you could have a difference between the compulsory withholding and the entire amount that you will owe Uncle Sam.

The good news is that you might qualify for a refund if your winning earnings do not shoot up your tax bracket.

Local and State Tax

The rules of each state when it comes to lottery winning differ. As a result, be sure you are familiar with what the rules say. People living in New York, for instance, will pay the state 8.82%, the city will also get 3.876%. All this is in addition to the 24% federal withholding tax. 

People in any of these seven states – South Dakota, Texas, Nevada, Florida, Alaska, Wyoming, and Washington will not have to pay state tax on their earnings since the state does not have an income tax. 

Also, three states – Tennessee, California, and New Hampshire do not include state lottery money from income tax. With this, be sure you are aware of the rules before you play the lottery in a different state.



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