Winning the lottery jackpot is an exhilarating experience. The joy of holding a winning ticket worth hundreds of millions of dollars is hard to describe. However, once the initial excitement wears off, jackpot winners need to consider the tax implications of their windfall. There are federal and possibly state taxes that apply to lottery winnings which can significantly reduce the final payout. Understanding how much tax is owed on a jackpot is important for financial planning.
Federal Tax on Lottery Winnings
At the federal level, lottery winnings are taxed like ordinary income based on the tax bracket of the winner. The highest current federal tax rate is 37% for income over $539,900 for single filers and $647,850 for married couples filing jointly. This means winners of massive jackpots worth hundreds of millions owed to a single person can expect to pay 37% or more in federal tax.
However, the federal tax rate is marginal, meaning winnings are taxed at progressively higher rates. For example, a single filer winning $100 million jackpot would pay:
- 10% on the first $9,950 = $995
- 12% on income from $9,951 to $40,525 = $3,806
- 22% on income from $40,526 to $86,375 = $9,982
- 24% on income from $86,376 to $164,925 = $15,611
- 32% on income from $164,926 to $209,425 = $14,942
- 35% on income from $209,426 to $523,600 = $92,955
- 37% on income over $523,600 = $27,709
Adding this up, the total federal tax on a $100 million jackpot for a single filer is $166,000. So the amount over 37% is just applied to the amount of winnings above the 37% bracket threshold.
State Tax on Winnings
In addition to federal tax, most U.S. states also tax lottery winnings taken by residents. Only a handful of states with no income tax, like Florida and Texas, do not tax lottery winnings. Among states with an income tax, most treat lottery winnings like ordinary income when applying their tax rates. Some states, like California, have special tax rates that apply to lottery winnings.
| State | Top Tax Rate on Ordinary Income | Special Rate on Lottery Winnings |
|---|---|---|
| California | 13.3% | 8.8% |
| New York | 8.82% | N/A |
| Texas | 0% | 0% |
Some city and local municipalities may also tax lottery winnings. So it is important to check the specific tax laws in your jurisdiction if you win a jackpot.
Federal Withholding on Jackpots
To ensure federal taxes are paid on large lottery prizes, the IRS requires 25% withholding on winnings over $5,000. This applies to the full amount, so 25% federal tax is withheld even if the winner expects to be in a lower bracket. This can create cash flow issues since a winner may have to wait until filing a tax return to get back any excess withholding. Winners have the option to increase withholding, such as to cover estimated state tax liability.
Claiming Prizes Anonymously
Some lottery winners prefer to remain anonymous for privacy and security reasons. However, anonymous claims of lottery prizes are not allowed in every jurisdiction. Only about a dozen U.S. states allow winners to claim jackpots anonymously or through a trust. State laws permitting anonymous claims include Delaware, Kansas, Maryland, North Dakota, Ohio and South Carolina. The majority of states require public release of the winner’s name for transparency purposes.
Tax Strategies to Reduce Tax on Winnings
While lottery winnings face hefty taxes, some strategies can help reduce tax liability. These include:
- Claiming over multiple tax years – Jackpots can be taken as annuity payments over decades to spread taxation over time.
- Using tax-advantaged accounts – Winners can contribute to retirement accounts or donate to charity to reduce taxable income.
- Moving to a state with no income tax – This avoids state tax and may provide other benefits.
- Working with a tax professional – They can help develop a comprehensive strategy to minimize taxes.
How Long Do You Have To Claim Jackpot?
Lottery winners cannot wait indefinitely to come forward and claim their prize. Every lottery has a limited window of time where jackpot winners must claim their winnings. If no one claims the prize in that timeframe, the money either rolls over into the next jackpot or is redistributed in some way.
Time limits to claim prizes range from just days or weeks to over a year in some cases. Here are claim periods for two large national lotteries:
- Powerball – Winners have 180 days from the draw date to claim the prize. Unclaimed money goes back to the states selling Powerball tickets.
- Mega Millions – The deadline is 180 days in most states, but 365 days in some like California and Illinois. Unclaimed funds return to the state lotteries offering Mega Millions.
For multistate games, the specific claim rules depend on where the ticket was purchased. State lottery games typically have 90 to 365 days to file a claim before the prize expires.
Does Powerball Withhold Taxes?
Powerball certainly does withhold federal taxes from large jackpot prizes. As required by IRS rules, Powerball automatically takes out 25% for federal taxes before paying out jackpots over $5,000. Some states where Powerball tickets are sold also require state tax withholding from prizes.
Powerball winners have the choice between two payment options:
- Lump Sum – The full jackpot amount is paid immediately, less taxes withheld.
- Annuity – The jackpot is split into 30 graduated payments invested to generate income, taxes apply as money is paid out.
Both options involve upfront tax withholding at 25% federal and possibly state. Annuity payments involve ongoing taxation as money is received annually.
Do You Pay Tax on Scratch Offs?
Winnings from scratch off lottery games face the same tax treatment as drawing-style lotteries. Federal tax applies at ordinary income rates based on your tax bracket. Additionally, most states tax scratcher winnings taken by residents. Typical scratchers have smaller prizes, but taxes still apply.
Federal and possibly state taxes are withheld when redeeming larger scratch off prizes above $5,000 at lottery offices. For smaller prizes, it is up to winners to report earnings and pay applicable taxes when filing returns. Detailed records prove winnings for tax reporting.
How Much is Taxed if You Win the Lotto?
If you win the lottery jackpot, whether Powerball, MegaMillions or a state lottery game, you can expect to pay substantial federal and possible state taxes. At the federal level, your lottery winnings are taxed at ordinary income tax rates, up to the current top rate of 37%. Your highest dollar winnings can expect to pay the top 37% rate.
In addition, most states charge income tax on lottery winnings for residents. Only the handful of states with no income tax avoid state tax. Among states with income tax, most apply their ordinary tax rates to lottery winnings. So combined federal and state taxes quickly add up for big jackpot winners.
Do I Have To Pay Taxes If I Win The Lottery?
Yes, there is essentially no way to avoid paying taxes on lottery winnings. At the federal level and in most states, lottery prizes are subject to income tax like regular wages or investment income. The only exceptions are a few states like Florida, Texas and Washington that have no state income tax to apply to lottery winnings.
Even if you claim a jackpot through a trust or other legal entity, taxes still apply based on who the ultimate beneficiary receiving the funds is. Lotteries also automatically withhold taxes upfront before paying prizes over $5,000.
Attempting to avoid legally owed taxes on lottery winnings is not advisable. All prizes and earnings get reported to tax authorities, so trying schemes to evade tax likely end badly.
What if I Don’t Have Money to Pay Taxes on Winnings?
If you win a sizable lottery prize but lack the funds to immediately pay estimated taxes, you have some options:
- Claim winnings over multiple years – Annuity payments on jackpots can help match tax flow to available funds.
- Pay out of pocket when filing return – No penalty if at least 90% of tax is paid by filing deadline.
- Borrow money – Banks may offer loans backed by future annuity payments.
- Make estimated payments over time – Some flexibility exists on when quarterly estimated payments are made.
- Negotiate installment agreement with IRS – May charge fees/interest but ideal for temporary hardship.
The key is being proactive and having a plan to meet tax obligations rather than ignoring them, which can trigger harsh penalties.
Are Lottery Winnings Taxed at State and Federal Level?
Yes, lottery prizes and gambling winnings face taxation at both federal and state levels in most cases. At the federal level, lottery jackpots and prizes are taxed like ordinary income based on your tax bracket. Federal tax rates go up to 37% currently.
In addition, most states with an income tax apply their own tax rates to lottery winnings paid to residents. Only about 10 U.S. states have no income tax and therefore do not tax lottery winnings. But among states with income tax, winnings are generally taxed at applicable state rates also.
So combined federal and state taxes quickly add up when winning a major lottery jackpot. Withholding often applies at both levels for large prizes. Some states, like California, have special rates for taxing lottery winnings. But winnings are still taxed both federally and by most states.
Should I Create a Trust to Claim Lottery Winnings?
For major lottery jackpots, creating a trust to claim the prize offers some financial management and privacy benefits compared to claiming as an individual.
Benefits of claiming a jackpot through a properly structured trust include:
- Avoiding probate on the winnings when you pass away
- Facilitating orderly transfer of money to heirs or charities over time
- Protecting anonymity by naming a trustee to claim the prize
- Allowing a team to manage investing and allocating funds
- Limiting legal access creditors may have to the money
However, taxes still apply based on who the ultimate beneficiary of lottery winnings is. And not all states allow anonymous claims through trusts. So while trusts can provide some advantages, taxes and state rules still apply.
Can I Gift Lottery Winnings to Family Tax Free?
Unfortunately, gifting any substantial lottery winnings to family members or others does not avoid income tax. At the federal level and in most states, lottery prizes are taxable income to the winner regardless of what is done with the money afterwards.
You can gift up to $15,000 per person per year federal gift tax free. But larger gifts simply count against your lifetime federal gift and estate tax exemption currently at $12.06 million. Income tax still applies on lottery winnings when originally received.
There is no way to legally transfer lottery winnings to fully avoid income tax liability. Even spreading gifts across multiple family members triggers tax. Any scheme to avoid legally owed taxes could lead to prosecution for tax evasion.
Conclusion
Lottery jackpots come with hefty tax obligations. At the federal level, lottery winnings are taxed like ordinary income at rates up to 37% currently. Most states also apply income tax to prizes claimed by residents. Only about 10 states avoid taxing winnings.
Combined federal and state taxes can take 40% or more of a jackpot. Mandatory withholding applies to large prizes. Some strategies like annuity payments can spread taxation over time. But ultimately taxes make a big dent in lottery fortunes.