How much is tax on lottery winnings?
What’s the reality for a lottery winner? This article will take you through the taxes lottery winners have to pay.
Summary
Each year, Americans spend billions on lottery tickets but may not consider how much tax they have to pay if they win.
Lottery winnings are taxed by the IRS.
When you win a large sum on the lottery, you can choose between getting it as a lump sum or in small payments.
A financial advisor is the best source of financial guidance, whether you’re a lottery winner, building your investment portfolio, or planning for retirement.
Are lottery winnings taxed?
Yes, you will be taxed if you win the lottery.
Each year, Americans spend billions on lottery tickets.
But while millions of hopeful ticket holders dream about the experiences they might tick off their bucket list when they win, few are thinking about the reality of how the winnings will impact their next tax bill.
What is the federal tax on lottery winnings?
Before a penny from your lucky ticket reaches your account, the IRS will take 25% of your winnings as federal income tax withholdings. That is also before you pay any state or district taxes from your big win.
Although lottery wins are an extraordinary occurrence, the IRS counts them as ordinary taxable income. It’s for this reason that many lottery winners find themselves in need of a good financial advisor.
Let’s look in more depth at some common questions about lottery winnings.
What is the best way to take your lottery winnings?
When you win a large sum on the lottery, you can choose between getting it all in one go (lump sum) or in small payments (annuity).
It’s up to you how you choose to take your winnings, but how you receive them can impact the amount of tax you pay. Each payment type has pros and cons; a financial advisor is the best person to talk you through these and help you manage your money.
If you win big and take all the money in one go, even after taxes, you can make a huge purchase, such as a house, and probably still have lots left over.
However, if you worry about burning through the riches too quickly, you might prefer smaller payments over a long period of time. In this case, you might choose the annuity option. For winners of smaller amounts, an annuity can reduce their tax burden by spreading their winnings over several years. This might rob you of the chance to splurge immediately but will extend your income for years.
Some statistics suggest lottery winners are more likely to go broke and have to declare bankruptcy than the average American. Lottery winners can become overwhelmed by their winnings and burn through them at an amazing pace. No matter how big your win is, there’s a risk of squandering it without proper financial planning.
Whether you’ve won big on the lottery or you’ve come into some money and want to manage it wisely, speaking to a financial advisor is the best place to start.
They can help you create a financial plan that works with your needs and goals, setting you on the path to financial success. Unbiased can match you with a financial advisor in less than 48 hours.
Find your financial advisor here.
How much is lottery tax?
As mentioned, in the eyes of the IRS, lottery winnings are viewed the same as any other income. So, you’ll have to pay federal income tax on your lottery winnings.
If you win one of the US’ top lottery prizes, such as the $2.04 billion jackpot in November 2022 – the largest jackpot to date – you’ll immediately find yourself in the top 1% of earners. The top bracket for federal income tax affects those earning more than $539,000 per year, paying 37% income tax.
In addition to federal taxes, you may also have to pay state income tax on your lottery winnings. If you live in one of the nine states with no income tax, you’ll keep more of your winnings, but if you live in New York, for example, you’ll pay as much as 8.82% in state income tax.
You’ll have to check the rates where you live to know how much you’ll have to pay in state income tax on your winnings, and local taxes can also apply.
If you choose to receive your winnings in an annuity, this will change how you pay tax on the winnings, as your taxable income might not rise so dramatically.
When do you pay tax on lottery winnings?
The IRS withholds 25% of your winnings immediately, but you’ll pay the rest of the federal income tax you owe when your taxes are next due in April.
How can you reduce your tax burden if you win the lottery?
As mentioned, choosing annuity payments instead of a lump sum payment could lower your tax burden by keeping you in a lower income bracket.
Many people fantasize about sharing their winnings with family and friends, and according to 2023’s regulations on gift allowances, you can gift your nearest and dearest up to $17,000 per person before paying a gift tax.
If you’ve got a non-profit organization close to your heart, giving a sizable donation could help lower your tax bracket, too, and therefore lower your income tax rate.
Get expert financial advice
You don’t need to win the lottery to get great financial advice.
Unbiased can connect you with financial advisors who work with professionals in every income range to save money on their tax bills and help them with their financial planning.
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Writers
Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.