Taxes on Lottery Winnings by State
Despite being home to Las Vegas, Reno, and Atlantic City, the United States hasn’t had the best reputation with gambling, and it is much more restricted here than it is across most of Europe and Asia. But where it does exist, it flourishes, and state lotteries are proof of that.
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Every year, these lotteries generate over $70 billion in ticket sales, and the US is also home to the world’s biggest lottery jackpots, with Mega Millions and Powerball eclipsing anything offered in Europe, Canada, Australia, and Asia.
But there is one downside to all of this, because while Americans do have it better than many Europeans when it comes to lotteries, we’re a little behind the times when it comes to taxing lottery wins.
In the UK, every penny you win on the slots, sports betting, lottery or any other form of gambling is tax-free. Here in the US, if you win a jackpot, a substantial sum could be taken away from you and even if you walk away with a raffle prize, like a car, you’ll be expected to pay tax.
The question is, how do these taxes differ from state to state. How does federal tax and income tax impact your lottery winnings; how does your state income tax and income tax bracket change the amount of money you need to give the government when you win big?
Lottery Jackpot Taxes
Every state has its own law governing state income taxes and these laws concern the player’s residence as opposed to the location of the lottery. For instance, if you live in New York City but have bought a lottery ticket for the Florida Lottery, you’ll pay taxes based on the New York rate and not the Florida rate.
Here is a quick run-down of all state lottery tax rates in the United States:
- Alabama – no state lottery
- Alaska – no state lottery
- Arizona – 5 %
- Arkansas – 7 %
- Colorado – 4 %
- California – no state tax rate on lottery winnings
- Connecticut – 6.99 %
- Delaware – no state tax rate on lottery winnings
- Florida – no state tax rate on lottery winnings
- Georgia – 6 %
- Hawaii – no state tax rate on lottery winnings
- Idaho – 7.4 %
- Illinois – 4.95 %
- Indiana – 3.40 %
- Iowa – 5 %
- Kansas – 5 %
- Kentucky – 6 %
- Louisiana – 5 %
- Maine – 5 %
- Maryland – 8.75 %
- Massachusetts – 5 %
- Michigan – 7.25 %
- Mississippi – no state lottery
- Missouri – 4 %
- Montana- 6.9 %
- Nebraska – 5 %
- Nevada – no state lottery
- New Hampshire – no state tax rate on lottery winnings
- New Jersey – 8 %
- New Mexico – 6 %
- New York – 8.82 %
- North Carolina – 5.499 %
- North Dakota – 2.9 %
- Oklahoma – 4 %
- Ohio – 4 %
- Oregon – 8 %
- Pennsylvania – 3.07 %
- Rhode Island – 5.99 %
- South Carolina – 7 %
- South Dakota – no state tax rate on lottery winnings
- Tennessee – no state tax rate on lottery winnings
- Texas – no state tax rate on lottery winnings
- Utah – no state lottery
- Vermont – 6 %
- Virginia – 4 %
- Washington – no state tax rate on lottery winnings
- West Virginia – 6.5 %
- Wisconsin – 7.65 %
- Wyoming – no state tax rate on lottery winnings
What Happens if You Win Big?
As with all income taxes, the state tax isn’t the only rate that you pay. You’ll also have the burden of federal taxes, as well as taxes levied on specific lotteries. For instance, a law known as the Tax Cut and Jobs Act was signed in 2017 and charged a flat rate of 37% on all Powerball jackpots. That’s a staggering sum of money and it makes the jackpot somewhat less appealing.
If you are lucky enough to scoop a big win on any major lottery, you should first consult with an expert. They can advise on the best course of action, offering guidance that can help you to secure a tax break.
Prize Money: Annuity Payment or Lump Sum?
Mega Millions and Powerball jackpots can be released as an annuity or a lump sum. An annuity pays a larger sum of money in 30 annual installments, while a lump sum pays a smaller amount in one go. The vast majority of winners choose the latter, as they want the money now, but an annuity is often the better option.
The difference can be quite staggering. For instance, the largest amount ever won by a single ticket holder was a jackpot of $1.5 billion claimed on Mega Millions. The winner, a player from South Carolina, chose the cash value and walked away with a sum of $877 million before tax. That’s still a lot of money, but it’s a lot less than $1.5 billion.
The issue is that many players assume the payments will just stop when they die, which means they’ll lose everything.
But the payments will actually continue and will simply go to your estate. Not only will you get a larger sum, but by avoiding such a sudden windfall, you can spread the taxes and responsibility out a little more and receive your cash in safe, staggered payments.
Although it can feel like that money will last forever, the history of major lotteries is littered with stories of players who won vast sums of money and then blew it all in just a few years. They buy houses and cars, they give money to friends, throw it at businesses, and generally live like there is no tomorrow.
But that tomorrow eventually rolls around, their money disappears, and they have nothing to show for their success but a house they can’t afford, a tax bill they can’t manage, and an empty feeling inside.
By staggering the payments, you can avoid such a disaster and guarantee a much larger income over the next few decades. If you’re not sure which option is right for you, speak with a tax professional and they will advise accordingly.
What About Global Lotteries?
There are a few misconceptions about global lotteries. Firstly, many players assume that you need to be a resident of that country in order to play its national lottery. This simply isn’t true. After all, lottery organizers want to sell as many tickets as they possibly can and preventing entire countries from purchasing tickets wouldn’t help them achieve that goal.
In fact, one of the reasons Mega Millions and Powerball have experienced a surge in recent years is because many foreign players are buying tickets.
They hear about the astronomical Powerball jackpot sums, they want a piece of the action, and so they use online sites to buy their tickets. These sites essentially work as intermediaries, giving players access to lotteries that would otherwise not be available to them.
And therein lies the real issue here. Because, while you can technically buy national lottery tickets from all over the world, that only applies if you can get your hands on them and because there are no officially licensed vendors operating outside of the official regions, this isn’t always easy.
Many visitors to the United States have purchased Mega Millions and Powerball lottery tickets, only to win when they returned home and then have to fly back to the US to collect their prizes!
You can do the same thing if you ever visit Europe, just make sure the lottery is drawn when you’re still there!
As for the tax issue, you can’t escape tax just because you bought your ticket in a tax-free country. For instance, if you live in the United States but buy a ticket to the UK Lotto or the European EuroMillions, you’ll need to pay tax on your winnings based on the federal and state tax rate. You’ll have to declare this money as gambling profit and can’t avoid the taxman simply because you won money in a tax-free country.
But don’t worry, because that doesn’t mean that foreigners have it better when it comes to US lotteries. They will be charged a flat rate of 30% on all US lottery prizes and may also face charges in their own countries.