How to Calculate Taxes on Lotto Winnings

Any lottery winnings are subject to a federal income tax, meaning that anyone who wins a multimillion-dollar jackpot must pay a certain amount of the winnings to the federal government. Besides federal tax, the winner of the lottery also has to pay a certain percentage toward state tax, depending on the state the lottery is won in.

If you win the lottery, you will have to give the IRS a share.
If you win the lottery, you will have to give the IRS a share. (BananaStock/BananaStock/Getty Images)
Step 1:

Find out how much tax is owed to the federal government. If you won between $0 and $5,000, you have to report your winnings on your federal tax return. The amount you pay will depend on your tax bracket, which can change on a yearly basis. However, if you win more than $5,000, your state government automatically takes out 25 percent, which goes toward federal taxes. When you submit your federal tax form, it will reflect that you already paid tax on this at the 25 percent rate. If you are in a higher tax bracket than 25 percent, you may owe more income taxes with your return.

Tax form
Tax form (Creatas/Creatas/Getty Images)
Step 2:

Calculate how much state tax you owe on your winnings. Every state has its own rules for how large of a percentage it removes from your lotto winnings; however, it usually ranges between 5 percent and 12 percent. And there are a few states that do not take any taxes from lotto winnings: California, Delaware, Pennsylvania, Tennessee, Texas and Washington. For all other states, check with a representative from your state department of revenue as tax rates are subject to change every year.

Tax preparer with client
Tax preparer with client (Creatas/Creatas/Getty Images)
Step 3:

Add the two taxes together. For example, if you won a $10,000 lottery prize in Massachusetts (5 percent taxable winnings), you owe $2,500 to the federal government and $500 to the state of Massachusetts. Those two amounts equal $3,000, which is the total amount of taxes you must pay on a $10,000 lottery prize.

Lotto
Lotto (Hemera Technologies/PhotoObjects.net/Getty Images)
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Tips & Warnings

  • All tax rates are subject to change every year.

References

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