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 25 percent federal withholding tax. Win $400,000 or more for a single person or $450,000 for a couple and the tax rate jumps to, gulp, 39.6 percent. It used to be 35 percent until the government almost went over the financial cliff in late 2012. The change was codified in the Taxpayer Relief Act of 2012 [sources: Duncan, Prante].
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 8.97 percent tax rate. If you live in New York City, add another 3.88 percent on all income over $500,000 [sources: Duncan, Novack].
However, California, Pennsylvania and states with no income tax (you go, New Hampshire), will not tax your lottery winnings. If you live in Arizona, you'll be slammed with a 5 percent tax on the prize, while nonresidents will have to dole out 6 percent [source: Ellis].
So before you spend all your winnings, remember that some of that cash belongs to Uncle Sam.
- Ellis, Blake. "You won the lottery! What's your tax hit?" CNN. Nov. 30, 2012. (Oct. 15, 2014) http://money.cnn.com/2012/11/30/pf/taxes/powerball-lottery-tax/
- Duncan, Kevin et al. "Lottery Tax Rates Vary Greatly by State." Tax Foundation. Mar. 29, 2014. (Oct. 15, 2014) http://taxfoundation.org/article/lottery-tax-rates-vary-greatly-state
- Novack, Janet. "Minus Taxes And Hype, $636 Million Jackpot Shrinks To $206 Million -- Or Less." Forbes. Dec. 17, 2013. (Oct. 15, 2014) http://www.forbes.com/sites/janetnovack/2013/12/17/minus-taxes-and-hype-636-mega-millions-jackpot-shrinks-to-206-million-or-less/
- Prante, Gerald and John, Austin. "Top Marginal Effective Tax Rates by State and Source of Income, 2012 Tax Law vs. 2013 Tax Law." Social Science Research Network. Feb. 3, 2013. (Oct. 15, 2014) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176526