Lottery Tax Law

Lottery winnings are taxed by the IRS.

Taxpayers who win more than $600 in lotteries are subject to federal withholding taxes. Depending upon the taxpayer's federal tax bracket and the state in which he resides, the tax rate can be as high as 50 percent.

Types

Noncash lottery winnings are reported using the fair market value of the prize. The federal tax amount that is required to be paid immediately to the Internal Revenue Service (IRS) must be paid in cash by the lottery winner or by the payer.

Size

A taxpayer is required to complete Form W-2G for winnings that exceed $5,000. The lottery payer will provide a Form W-2G to reflect the winnings; a copy is provided to the IRS. There is an immediate federal income tax withholding of 25 or 28 percent. If the taxpayer does not provide a tax identification number or Social Security number, the lottery payer must withhold the backup withholding rate of 28 percent, instead of the usual 25 percent that is automatically withheld.

Considerations

The taxpayer declares the winnings as income when payments are made. Lump-sum payments are due in the same year that the winnings are paid. If the taxpayer chooses installment payments of the lump sum, then he is required to file Form W-2G annually, to account for the annuity paid each year.

References

• Internal Revenue Service: Instructions for Forms W-2G and 5754

Resources

• USA Mega: Mega Millions FAQ