Lottery Prize Taxes
A federal withholding of 24 percent is made immediately from lottery wins worth $5,000.01 or more. Non-U.S. residents lose 30 percent.
Lottery prizes are counted as income and you must declare the winnings at tax time. Winners will need to file IRS form W-2G if the prize is $600 or above. You will either be billed for more or receive a refund from the initial withholding, depending on your annual income.
The top federal tax rate is currently 37 percent, which is charged on taxable income of more than $518,400 if you're single, or $622,050 if you're married and file a joint return.
Due to progressive federal tax brackets, you may not pay the same tax rate on the whole prize - different parts of your win may be taxed at different rates, depending on how large the prize is and how much you already earn.
Many players must also pay state taxes, depending on where they live. Large prizes such as the jackpot are all subject to federal tax obligations, but the overall levy depends on where you bought your ticket.
Most states will withhold an initial amount for local taxes before the prize is paid out. Withholding often kicks in if the prize is over a certain amount, such as $1,000. Just as with federal taxes, you'll need to report all income when you file your return, and depending on your income, you may need to pay more or you may receive a refund from the withholding.
However, five states - Wyoming, Washington, Texas, South Dakota, and Florida - don't levy income taxes on their residents, while Tennessee and New Hampshire only impose taxes on income from dividends and interest.
Some states have a flat tax, where you'll pay the same no matter how much (or little) you earn, although most have progressive tax bands where you're taxed more as your income increases.
Current flat tax states are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, and Pennsylvania (Utah is also a flat tax state but doesn't have a lottery).
Arizona and Maryland also apply withholdings for non-residents, which means that if you bought the winning ticket there, you'll owe taxes to the state even if you don't live there.
U.S. Territory Taxes
Puerto Rico is in a unique position - although it's a U.S. territory, no federal income tax is typically payable to the IRS, and Puerto Rico doesn't levy a local tax on lottery prizes either.
The U.S. Virgin Islands doesn't charge a local tax on winnings, but federal income tax is still due at mainland rates.
Lottery Tax Rates by Jurisdiction
Here are the tax rates in the participating Powerball and Mega Millions states and jurisdictions (note that Mega Millions is not available in Puerto Rico):
|No state tax on lottery prizes||California, Florida, New Hampshire, Puerto Rico, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Washington State, Wyoming|
|4%||Colorado, Missouri, Ohio, Oklahoma, Virginia|
|5%||Arizona, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, Nebraska|
|6%||New Mexico, Vermont|
|7%||Arkansas, South Carolina|
|8%||New Jersey*, Oregon|
|*NJ withholds state taxes of 5% on wins of $10,000 to $500,000, and 8% on wins over $500,000, or over $10,000 if the winner does not provide a Tax Information Number.|
Taxes on Cash vs. Annuity
Lottery winners can choose to have their prize paid out as an annuity (paid annually over 29 years) or as a smaller cash lump sum right away - see the details of cash vs. annuity.
You are only taxed on income received in a set tax year, so those who choose the cash lump sum jackpot option pay a one-time levy on their win. However, they will be liable for taxes on income earned from the sum in future years.
Winners who choose the annuity option pay taxes on each annual payment at a rate dependent on its value.