Lottery & Taxes: How Taxes Apply to Your Earnings

Nothing saps the joy of winning the lottery like paying taxes. Here is everything you need to know about how they apply to your earnings.

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Adam Moelis
Aug 8, 2022
15 min read

The lottery is a booming industry in the United States. Every year, millions of Americans will combine to spend billions of dollars buying lottery tickets. The dream of winning the jackpot is enough for these Americans to overlook that the odds of winning the lottery aren’t in their favor. Each ticket only has about a one in 292 million chance of winning the top prize.

While these odds are indisputably low, all that you have to do is hit the lottery once to receive generational wealth. There have been 393 tickets to win the Powerball jackpot since it was a little more than three decades ago. 

The total prize money between these tickets is around $25 billion for an average of $63.6 million per ticket. That’s a pretty solid return on investment for a $2 ticket.

The good news about winning the lottery is that you’ll be paid more than you’d make in several lifetimes working the average job. The bad news is that the government will take a sizable chunk of it. 

The IRS considers lottery winnings taxable, and you’re legally required to report lottery winnings on your tax return. The federal taxes are only the beginning, as you’ll also be taxed on a state and local level. 

You’ll still be rich beyond your wildest dreams, but the exact dollar amount of your new estate might not be as high as you think.

How Are Lottery Winnings Taxed?

Lottery winnings are taxed by federal, state, and local municipalities in the same way as any other income. The taxes are applied as if you worked a job for one day that paid a salary of a few hundred million dollars

You’re legally obliged to report the total sum of your winnings on your annual tax return in the same way that you must report all wages and salaries that you received.

The taxes you pay on your tax return won’t be the first time you’re taxed. You can expect the IRS to automatically take 25 percent of your winnings before you even see the first cent. You’re almost certainly going to owe more than that when you claim the winnings on your return, so this is just the first tax applied in a series of them.

On top of the federal tax, your state and local governments will also apply a tax to your winnings. The total amount you pay in taxes can vary significantly based on the state (more on that later), but it’s the same as your state’s income tax rates. 

That means if you live in a state with no income tax, you’ll net more money winning the lottery than someone living in another state.

Clearly, you’ll be paying a lot of taxes to win the jackpot. The highest federal tax rate in 2022 is 37 percent and applies to all income over $628,301. You could pay close to 50 percent of your winnings in taxes depending on where you live, how much you win, and the payment method that you select. 

Do Lottery Prizes Get Taxed?

Not all lotteries deal exclusively in cash. Plenty of options will offer you various prizes, including new cars, dream vacations, and expensive appliances. 

Although these prizes aren’t cash, they’re still taxed the same way as cash. The total value of the award you win must be reported and taxed accordingly.

What To Do If You Win the Lottery

  1. Keep the prize and pay the tax
  2. Sell the prize and pay the tax
  3. Request a cash equivalency instead
  4. Donate the prize to charity
  5. Refuse the prize

Depending on the value of the prize, you might find yourself in some hot water with the IRS. You will have to pay the taxes out of pocket for your prize, so a $100,000 sports car means you’ll need to pay at least $25,000 before claiming it. 

The good news is that you have several options for what to do whenever you win a prize:

Keep the Prize and Pay the Tax

If you want to keep the prize you’ve won, you’ll need to pay for it. The total amount will depend on a few factors, but you should expect to pay at least 25 percent of the total value in taxes.  

Sell the Prize and Pay the Tax

If you can’t afford the taxes or don’t want the prize, then you can simply sell the item, pay taxes on the proceeds, and pocket the rest of the cash. 

You probably won’t get the total value of the prize, and the taxes will take out a hefty chunk, but you’ll still leave the deal with more money than you had to go in.  

Request a Cash Equivalency Instead

Most lottery and contest organizers are willing to offer the cash valuation instead of the prize. The $100,000 car mentioned earlier would simply be replaced with a $100,000 check that would then be taxed as traditional income.

Donate the Prize to a Charity

Donating the prize can help a good cause and prevent you from paying taxes. You would lose ownership of the prize, but you could write it off on your tax return and lower your total tax obligation.

Refuse the Prize

You aren’t forced to accept anything that you win. If the prize isn’t worth the tax bill or hassle, you can simply refuse to accept it. You aren’t required to pay taxes for a prize that you never take ownership over.  

What Is the Tax Rate for Lottery Winnings?

The federal tax rate for lottery winnings is the same tax rate as traditional income, such as wages from your job. 

The tax rate typically changes every year. There are some years when it goes up and some years when it goes down. 

The tax rate that you pay is based on portions of your income. It’s not one flat rate but rather a progressive one that taxes each portion of your income differently.

Here are the current federal tax brackets for 2022:

  • A 10 percent tax rate on income of $10,275 or less for individuals; $14,650 or less for a head of household; $20,550 or less for joint filings
  • A 12 percent tax rate on income over $10,275 for individuals; over $14,650 for a head of household; over $20,550 for joint filings
  • A 22 percent tax rate on income over $41,775 for individuals; over $55,900 for a head of household; over $83,550 for joint filings
  • A 24 percent tax rate on income over $89,075 for individuals; over $89,050 for a head of household; over $178,150 for joint filings
  • A 32 percent tax rate on income over $170,050 for individuals; over $170,050 for a head of household; over $340,100 for joint filings
  • A 35 percent tax rate on income over $215,950 for individuals; over $215,950 for a head of household; over $431,900 for joint filings
  • A 37 percent tax rate on income over $539,900 for individuals; over $539,900 for a head of household; over $647,850 for joint filings

You can see how quickly the taxes will increase when you win the lottery. That’s not even taking into account the taxes on your salary or the social security tax, medicare tax, and additional state income taxes. Depending on where you live, you might be able to save a substantial amount of money in taxes. 

Here is a list of the 2022 income tax rates for each state:

  • Alabama: 2.0 to 5.0 percent
  • Alaska: None
  • Arizona: 2.59 to 4.5 percent
  • Arkansas: 2.0 to 5.5 percent
  • California: 1.0 to 13.3 percent
  • Colorado: 4.55 percent
  • Connecticut: 3.0 to 6.99 percent
  • Delaware: 2.2 to 6.6 percent
  • District of Columbia: 4.0 to 10.75 percent
  • Florida: None
  • Georgia: 1.0 to 5.75 percent
  • Hawaii: 1.4 to 11.0 percent
  • Idaho: 1.0 to 6.0 percent
  • Illinois: 4.95 percent
  • Indiana: 3.23 percent
  • Iowa: 0.33 to 8.53 percent
  • Kansas: 3.1 to 5.7 percent
  • Kentucky: 5.0 percent
  • Louisiana: 1.85 to 4.25 percent
  • Maine: 5.8 to 7.15 percent
  • Maryland: 2.0 to 5.75 percent
  • Massachusetts: 5.0 percent
  • Michigan: 4.25 percent
  • Minnesota: 5.35 to 9.85 percent
  • Mississippi: 4.0 to 5.0 percent
  • Missouri: 1.5 to 5.4 percent
  • Montana: 1.0 to 6.75 percent
  • Nebraska: 2.46 to 6.84 percent
  • Nevada: None
  • New Hampshire: 5.0 percent (only on interest and dividend income)
  • New Jersey: 1.4 to 10.75 percent
  • New Mexico: 1.7 to 5.9 percent
  • New York: 4.0 to 10.9 percent
  • North Carolina: 4.99 percent
  • North Dakota: 1.1 to 2.9 percent
  • Ohio: 2.76 to 3.99 percent
  • Oklahoma: 0.25 to 4.75 percent
  • Oregon: 4.75 to 9.9 percent
  • Pennsylvania: 3.07 percent
  • Rhode Island: 3.75 to 5.99 percent
  • South Carolina: 3.0 to 7.0 percent
  • South Dakota: None
  • Tennessee: None
  • Texas: None
  • Utah: 4.95 percent
  • Vermont: 3.35 to 8.75 percent
  • Virginia: 2.0 to 5.75 percent
  • Washington: 7.0 percent (only on capital gains income)
  • West Virginia: 3.0 to 6.5 percent
  • Wisconsin: 3.54 to 7.65 percent
  • Wyoming: None

Are Lottery Taxes Paid Based on the State Where I Bought the Ticket?

Purchasing a ticket in another state is not a disqualification for your winnings, whether you live in a state that has a lottery or not.

The lottery has steadily spread across the United States over the last several decades. There are now 45 states that offer some type of lottery. 

If you live in Alabama, Alaska, Hawaii, Utah, or Nevada, you’ll have to travel across state lines and meet the age requirements to buy a ticket. You’re still eligible to win the lottery even if you live in one of these states. 

The only potential issue is how many states you might owe taxes to. Currently, two states (Maryland and Arizona) will tax the winnings of people who bought a ticket in their state but live outside of it. If you buy a ticket in any of the other 43 states, you’ll only have to pay income taxes to the state in which you live.

Nine states don’t have a state income tax. If you live in one of those states and win the lottery, then you’ll most likely only have to pay federal taxes. 

Two other states (California and Delaware) have income taxes but don’t tax lottery prizes. Living in these states means you’ll have to pay taxes on your salary, not on your lottery winnings.

Is a Lump Sum Payment Taxed Higher Than Annuity Payments?

The last factor involved in the taxation of your lottery winnings is your selected payment method. Lottery winners are offered one of two types of payments:

  • Lump sum payments are one-time payments that will allow you to collect all of your winnings at once.
  • Annuity payments are made at established intervals until the total winnings are eventually paid out.

Depending on your payment type, you could wind up paying much more in taxes. Typically, opting for a lump sum payment will mean that you’ll pay more in taxes. 

You’ll most likely be moved to a higher income tax bracket for the year and see your tax rate triple to 37 percent. The winnings will be delivered and the taxes paid, but that’s a significant chunk to lose in the first year without anything to show for it.

Annuity payments operate in an entirely different way. Instead of receiving a single check, you’ll receive your payouts weekly, monthly, or annually. 

You’ll still need to pay taxes each year as these payments are considered taxable income. There are two ways that this payment method can save you money. 

The first is that tax rates fluctuate each year so that future tax rates might be lower than current ones. 

The second reason is the total payout that you receive each year might keep you in a lower tax bracket and shave a few percentage points off your tax obligation.

Be Sure To Keep Your Lottery Money Safe

There’s no way to describe how winning the lottery will change your life. It can be easy to get overwhelmed and make a few mistakes when you’re new to being a millionaire. The first step is to make sure that your money is safe. 

Only a few banks can safely protect the money you now have at your disposal. Before you spend a cent, you must ensure that your money is in the right hands. 

The best thing about being lucky is that the streak doesn’t have to end. You already hit the lottery once, so why not push your luck and see if lightning can strike twice? 

Keeping a small portion of your lottery winnings in a Yotta account is easy to enter the weekly sweepstakes for free

It won’t cost you anything to play, and you’ll have a chance to add $10 million to your bank account. It’s pretty easy to win when it’s impossible to lose!

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