After the largest Powerball lottery in history ended last week, many Americans may be wondering how much those lucky winners will walk away with. The final jackpot totaled $587.5 million, with two winners in Arizona and Missouri being the night's big winners. There are also several others who may have also won smaller prizes in the running. However, before those individuals can take possession of their reward, the IRS must first take its cut of the winnings.
Gambling winnings - including monetary prizes from horse races, lotteries, casinos, sweepstakes, poker tournaments and even Bingo - are all considered taxable by the IRS. In some cases, the winnings may incur high taxes, depending on several factors. First, the winners will face state taxes, the rate of which varies by their location. For example, the Arizona resident who won the Powerball will face a 5 percent tax rate, or 6 percent if the winner is a non-resident, according to the Tax Foundation. In contrast, the winner who won in Missouri will be charged a 4 percent tax rate. New Jersey residents typically pay the highest tax rates in the country for lottery winnings, which sit at 10.8 percent. Maryland residents are charged 9.25 percent, while non-residents face a tax rate of 7.5 percent. New York comes in third, with residents paying an 8.97 percent tax rate, plus an additional 3.648 percent for New York City.
Residents of certain states that do not impose an income tax may not face state liabilities, such as those who reside in South Dakota, Tennessee, Texas and Washington.
Federal tax rules
The IRS also takes its cut as well, with winnings in excess of $5,000 being subject to a 25 percent withholding tax. When it comes to receiving big payments, lottery winners -such as those who won the Powerball - can take the amount as an annuity payment, which will be spread out over a period of years and taxed each year. Or winners can take a large cash payment, which will be taxed immediately. In the case of the Powerball, if the two winners take the lump sum, they each will receive $192.5 million - and would owe roughly $67 million to the IRS, CNN Money reports. In addition, they will be taxed at the highest federal rate of 35 percent, the news source adds.
Lottery winners are also required to follow the proper tax filing rules, which require them to submit Form W-2G to report their winnings.
Liberty Tax Service (NASDAQ: TAX) has prepared over 2 million tax returns in 2012 alone and has over 4,100 offices in the United States and Canada. As the fastest growing tax franchise ever, Liberty Tax’s total revenues grew to $109.1 million last tax season. Liberty Tax stands behinds community enrichment efforts by sponsoring various non-profit organizations and urging their employees and franchisees to give back to their communities.
For a more in-depth look at Liberty Tax Services, visit http://libertytax.com or the Give Me Liberty! Magazine. Follow Liberty Tax on Facebook at http://facebook.com/LibertyTax<http://www.facebook.com/LibertyTax> and on Twitter at http://twitter.com/libertytax<http://www.twitter.com/libertytax> or check the blog at http://libertytax.com/taxlounge or contact Liberty Tax directly at 1-877-at-Liberty.