Did you play grandma’s lucky numbers for this week’s Mega Million lottery? How about your birthday and high school jersey number for this week’s Powerball drawing? If you play the winning lottery numbers and snag the grand prize or any of the smaller prizes, before you can take possession of the reward, Uncle Sam and the IRS must first take their cut.
When you win large sums of money from the lottery, you have two options.
- Take the winnings as a lump sum payment or,
- Take the winnings as an annuity spread out over three decades
Regardless of which option you choose, your win is reduced by a 24 percent federal tax withholding (prior to 2018, the withholding rate was 25 percent).
Think that’s it? Nope.
Remember how the Tax Cuts and Jobs Act changed the tax brackets? You would now be added to the top tax bracket! Individuals who make $500,000 or more are subject to a tax rate of 37 percent (down from 39.6 percent prior to 2018).
…and that’s all! Just kidding.
Can’t forget state taxes! Depending on where you live you could be taxed as high as 8.82 percent, like in New York or as low as 2.9 percent in North Dakota. Other states like, California, Delaware, Florida, Hawaii, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, won’t tax your winnings!
Lottery winners are also required to follow the proper tax filing rules, which require them to submit Form W-2G to report their winnings. Whether you win or not, it’s always a good idea to double-check your federal income tax witholding to make sure you won’t owe next tax season.
As people say, “You can’t win if you don’t play!” We wish you good luck and hope you remember to call us when you win that prize! Don’t forget to play responsibly. For more helpful tax information, contact Liberty Tax® directly at 1-877-at-Liberty, or visit a conveniently located Liberty Tax® office near you. For real-time updates, follow Liberty Tax® on Facebook and Twitter.