November 30, 2021

Are lottery wins taxable?

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Will the state or federal government tax your lottery winnings? Do you want to know how much the government will take from your lottery winnings if you win? Below, we’ll discuss lottery winnings and how much you can expect to receive after tax deductions.

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Are Lottery Winnings Taxable in the United States?

Your odds in winning the Mega Millions lottery are 1 in 302.5 million. While you’ve got a scarce chance to win the lottery, some people are lucky enough to experience it.

Let’s say you play for the Powerball lottery, which has a winning prize of over $750 million. Thanks to sheer luck, you win the $750 million. Do you get to collect all that money for yourself?

The answer is no because some of the winnings will go to the federal and state governments. The government considers your lottery winnings as taxable income. Also, remember that winning the lottery also increases your income.

The question is how much of it will go to taxes, and how much of it goes to you?

How Much Does the Government Tax Lottery Winners?

No matter how large your prize, 24% of it will go to federal taxes. If you won $750 million, the federal government would withhold $180 million for federal taxes.

Don’t get too comfortable yet because the IRS will tax you 13% of your taxable income. That’s $97.5 million going to Uncle Sam. After IRS and federal taxes, you now only have $472.5 million left, but that’s not where it stops.

Don’t forget that you’ve also got state taxes to pay, which vary depending on where you live and where you bought the ticket. Most state taxes range from zero to more than eight percent of your winnings. If you live in New York, you’ll be paying 8.82% of your prize to the state, which is $66.15 million.

In total, you’d lose around over 45% of your winnings to taxes.

Can You Minimize Lottery Taxes?

Lottery winners can choose to collect their winnings over a three-decade period or take the total sum in cash. How you receive your prize can manage how much the government will collect as tax.

To give you an idea, the best way to collect your winnings is via an annuity. Let’s say you have 20 years to collect the total winnings. You can get up to 15% tax savings compared to getting the lump sum.

If you want to understand better how the annuity is more advantageous, consult a tax attorney. A certified public accountant (CPA) or certified financial planner (CFP) can help you better comprehend your options.

Conclusion

Now, you have a more realistic expectation of how much you’ll receive from lottery winnings. Remember this the next time you get a ticket for the lottery.

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