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Lottery and Taxes | What You Need to Know about Your Winnings
Lottery and Taxes | What You Need to Know about Your Winnings

Lottery and Taxes | What You Need to Know about Your Winnings

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The lottery and taxes go together like peanut butter & jelly, although it does not taste nearly as good. In 2018, when the lottery was up in the billions – that’s right, billions with a “B”, there was much discussion about the amount of tax that would be owed from the winner would owe.

Sandra Block explained it well: “$1.6 billion [the jackpot at the time] is the value of annuity payments over 30 years. If you opt for an immediate lump-sum cash payment, your payout will be a mere $904.9 million—before taxes. And make no mistake: Your tax bill will be significant and unavoidable (Block, 2018).”

Did those numbers sink in? It’s one thing to hear: the IRS will automatically take out 25%; it’s another to see those winnings up close and personal. I mean winning over a billion dollars is quite an accomplishment, but getting less than one billion seems kind of like a letdown.

You did, after all, win the almost 2 billion dollars; that’s what the news will say, but you really got quite a bit less than that. So, before ear-marking that hot Lamborgini, know how much you will be able to take home and how much of your winnings will be taxed.

Do I have to pay taxes on my lottery winnings?

Unfortunately, the IRS does consider lottery winnings to be taxable, so you will have to pay taxes on your winnings. Lottery winnings are considered to be gambling winnings, which are part of your taxable income. The government wants its’ share of your lottery winnings.

There are two ways that you can pay out your share of the winnings to the IRS. You can pay them in a lump sum in the year you receive your winning amount, or you can pay by paying them a portion of your winnings every year that you are paid via annuity payments.

You don’t get to choose which way you pay the IRS, but you do get to choose which way you will be paid – either by a lump sum or in annuity payments. Whichever way you choose to be paid by the lottery will determine how you pay the IRS.

If you choose to get paid as a lump sum, then you will need to pay taxes on all your winnings for the tax year that you received all of the money from the lottery. If you decide to get paid annually from the lottery in annuity payments, you will need to pay taxes every year that you receive payments.

How will the IRS know that I won the lottery?

You may be thinking: How does the IRS even know I won the lottery? Can I just not report it and keep all the money for myself? What are the consequences of not reporting my lottery winnings?

The lottery agency should send you a W-2G Form: Certain Gambling Winnings if you receive earnings that are over $599. You will need to use the W-2G form to file your federal income tax return in April. The lottery agency will also send the IRS a copy of the W-2G form. That’s how they know you won the lottery.

Even if the lottery fails to send you and/or the IRS the W-2G forms, the IRS still requires you to report any winnings properly on your tax return. If you do not report your winnings on your tax return, you may receive an unexpected tax bill from the IRS and/or an audit notice for failing to report taxable income.

You could end up owing the IRS back taxes, penalties, fees, and/or interest. Play it safe and report your winnings on your taxes the way you should. The IRS has too many negative consequences if you fail to report your lottery winnings, so go ahead and do it the right way.

How are lottery winnings taxed – federally?

Luckily, you have won the lottery or are about to if you are reading this. But unluckily, the IRS will take 25% of your winnings right off the bat. You may owe an additional 13% for your state and local taxes too; the percentage you owe for state and local taxes will depend on which state you live in. Understandably, you may see this as unfair, but that’s just the way it is.

According to CNN Money, prize money is taxable income; lottery winnings are taxed just like income, and the IRS taxes the top income bracket. However, the government withholds 25% of that before the money even gets to the winner. The remainder is paid at tax time.

Basically, you owe federal income taxes on your winnings. The amount you owe depends on what tax bracket you fall under. The Trump GOP tax plan helped taxpayers who won the lottery by dropping the highest tax bracket rate from 39% to 37% giving high winners a small tax break.

Lottery Tax Calculator: A Simple Way to Calculate the Tax on Lottery Winnings

Want to know how much you will have to pay in taxes on the money you win? Check out this lottery tax calculator for a simple way to see how much tax you’ll have to pay on your lottery winnings.

With the lottery tax calculator, once you enter in your state and the amount you won or plan to win, it will show you at the bottom what your take-home amount will be.

If you expect to be paid in annuity payments, the amount of tax you will owe on your lottery winnings will decrease significantly for the year. Keep in mind though that you will have to pay taxes on the lottery annuity payments you receive for every year that you get those payments.

How are lottery winnings taxed – by the state?

After filing your federal tax return in April, you will need to file your state tax return, and you’ll have to report your winnings on there as well. Most states expect to get their share of your winnings, but the tax you will have to pay depends on which state you live in.

Since each state has its’ own set of rules about lottery taxes, you need to check with your state’s tax website to get the details. This lottery tax calculator should help you see how much your state will take out of your lottery winnings. Just choose your state on the dropdown menu to get access to the amount you will owe on your winnings.

If you live in one of these states you don’t have to pay state income tax on lottery winnings:

  •         Alaska
  •         Florida
  •         Nevada
  •         New Hampshire
  •         South Dakota
  •         Tennessee
  •         Texas
  •         Washington
  •         Wyoming

Should I take a lump sum or annuity payments?

If you choose to be paid in a lump sum payment, you will receive all of your winnings upfront. While that may be great for several reasons, for tax purposes, you will have to pay a lot of money the year that you get that lump sum in.

If you want to receive lottery payments each year, you will be taxed every year that you receive an annuity payment. You won’t be taxed as much in the year you win as you do if you get a lump sum, but you will still have to pay taxes; they’ll just be spread out over time instead of all at once. Either way, you will be paying tax on your lottery winnings.

What should I do after winning the lottery?

If you have just won the lottery, you probably have a lot of financial decisions to make. The very first thing you should do after winning the lottery is securing a relationship with a financial and/or tax advisor.

Conclusion

Robert Wood from Forbes magazine sums up the lottery taxes great: “Of course, everyone should know that taxes on winning tickets are an unavoidable downside. But who wouldn’t want this tax problem? Even after taxes, there’s lots left over, right (Wood, 2018)?”

However, he goes on to say, “Some lottery winners do not plan ahead, and can have trouble paying their taxes when they file their tax returns the year after they win. Depending on whether your state taxes lottery winnings, you may have to add state taxes too (Wood, 2018).”

The bottom line: Get some financial advice right away! It gets confusing and with all the financial decisions you will be making, you need someone who can help you keep track of where your money is going so that you don’t run out before reaching your financial goals.

Hire the Right Financial Advisor

Looking for a financial advisor? If you are unsure as to what kind of taxes you will have to pay on your gambling winnings, contact Borshoff Consulting! The rules on lottery tax are often hard to digest. We can help you with every part of your taxes and financial planning.

To read up on how to protect yourself and your money when you gamble, check out this article. We cover tax rates on gambling winnings, how you pay money on lottery winnings, how the amount you win matters, information about gambling winnings and losses, and the importance of keeping accurate records.

At Borshoff Consulting, we specialize in tax returns, financial planning, business advice, and more. To see how we can help you out with your tax and financial planning, give us a call! Borshoff Consulting can also help you with one-on-one audit assistance, support, and representation. Contact us today to schedule your free consultation. You can trust Indiana’s tax expert!

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