Ah yes, winning the lottery. It's a dream for all of us. Mega Millions, Powerball, Lotto. So many games. So many losers. But, if on the off chance you do win millions in a lottery jackpot, keep in mind that the Internal Revenue Service will be looking for its fair share.
While you don't have to report lottery winnings of $600 or less, if you win more than $5,000, the government will hit you with a 24 percent federal withholding tax. (Depending on your annual earnings and your deductions, you may get some of this back after filing your income taxes.) Win $500,000 or more for a single person or $600,000 for a couple and the tax rate jumps to, gulp, 37 percent. Still, this is lower than the previous rate of 39.8 percent, thanks to the tax law changes of 2017. (Note that the IRS will take 24 percent off the top and the rest will become due at tax time, though with deductions and other things you may not have to pay the whole difference.)
And that's not all. Your state department of revenue services will also be looking for their take. Woe to anyone who wins the big-buck lottery in New York. You'll get slapped with an 8.82 percent tax rate. If you live in New York City, add another 3.876 percent on all income over $500,000.
However, states with no state income tax, like Florida and Texas, will not tax your lottery winnings. And two other states (California and Delaware) don't tax state lottery winnings. Most states won't charge non-residents state taxes on their lottery winnings, with the exception of Arizona and Maryland, according to TaxAct. If you live in Arizona, you'll be slammed with a 4.8 percent tax on the prize, while nonresidents will have to dole out 6 percent.
So before you spend all your winnings, remember that some of that cash belongs to Uncle Sam and choose wisely where you play.
Originally Published: Nov 26, 2014