If you win $1,000 or more from the lottery, you will likely need to pay taxes on those winnings. The exact amount of tax you owe will depend on a few factors, including whether it was a jackpot prize or a smaller prize, the rules in your state, and your own personal tax situation.
Quick Answer
In most cases, if you win a lottery prize of $1,000 or more, you will need to pay federal and possibly state taxes on the money. The federal tax rate is typically 24% for federal taxes. You may also owe state taxes, which vary by location but are usually around 5%. However, there are some exceptions, like if you live in a state with no income tax. The lottery organization should withhold taxes when you claim your prize, but it’s a good idea to consult a tax professional to determine how much you may owe.
Federal Taxes on Lottery Winnings
At the federal level, lottery winnings are considered “gambling winnings” by the IRS. This means they are fully taxable income. According to IRS rules, a 24% flat federal tax rate is applied to lottery winnings over $5,000, regardless of your tax bracket. This federal tax is withheld immediately when you claim your lottery prize over $5,000. If your prize is under $5,000, there is no federal tax withholding, but you still must report the winnings on your tax return.
For a $1,000 lottery prize, you do not have federal taxes withheld upfront. However, you still have to report the $1,000 as income on your federal tax return. It will get lumped in with your other ordinary income for the year, like your wages. If you are in the 12% federal tax bracket, you would owe about $120 in federal tax on the $1,000 lottery winning.
State Taxes on Lottery Winnings
In addition to federal taxes, you may owe state taxes on lottery winnings over a certain threshold. This varies by state, since not all states impose income tax. Here are some state tax policies on lottery winnings:
- California – No state tax on lottery winnings.
- Florida – No state income tax but may owe other state taxes.
- New York – 8.82% tax on winnings over $5,000.
- Texas – No state income tax but may owe other state taxes.
- Illinois – 4.95% tax on winnings over $1,000.
For a $1,000 lottery prize, you would not owe state income tax in states like California, Florida, Texas, and others with no income tax. But you would owe state tax in a place like Illinois which taxes winnings over $1,000. In that case, you would owe about $50 in Illinois state tax on a $1,000 lottery prize.
Other State Taxes
Some states don’t have income tax but may still tax lottery winnings through other means. For example, Florida and Texas do not have state income tax but they do require you to pay sales tax on large lottery winnings claimed as a lump sum. This tax can be several thousand dollars depending on the size of your prize. Smaller $1,000 prizes may be exempt from sales tax in some states.
Tax Withholding Requirements
When you claim a lottery prize over certain thresholds, the lottery agency is required to withhold taxes for you. Here are some state withholding requirements:
- Federal taxes – Withheld at 24% rate for prizes over $5,000.
- California – No withholding.
- Illinois – Withholding of 4.95% on amounts over $1,000.
- New York – Withholding of 8.82% on amounts of $5,000 or more.
So for a $1,000 lottery prize, you would not have federal or California taxes withheld, but Illinois would withhold around $50 for state taxes. It’s important to note withholding rarely covers your full tax obligation. You often need to pay additional tax when you file your return.
Claiming Prizes and Anonymity
To claim a lottery prize, you need to fill out paperwork and provide your identification and Social Security number. This allows the lottery agency to report your winnings to the IRS and withhold any necessary taxes. Rules vary by state, but for larger prizes you usually cannot remain anonymous. Your name and city may even be publicized by the lottery commission.
However, a few states do allow you to claim lottery prizes anonymously through a trust or other legal entity. In those cases taxes are still withheld, but your identity remains private. States permitting anonymous claims include Delaware, Kansas, Maryland, North Dakota, Ohio, and South Carolina.
Reporting Lottery Winnings
If you win a small lottery prize under reporting thresholds, make sure you still report it properly on your tax return. While taxes won’t be withheld, you are still responsible for paying applicable taxes. IRS Form 1040 Schedule A is where you report gambling winnings like lottery prizes. Failing to report can lead to tax evasion charges and penalties.
Getting a Tax Refund
When you claim a lottery prize, taxes are often over-withheld, especially for lump sum jackpots. Just like with your regular paycheck, tax withholding on lottery winnings is only an estimate of what you will owe. When you file your tax return, you may find you overpaid and are due for a refund.
For example, say 25% tax was withheld from a $1 million jackpot. That’s $250,000 withheld upfront. But if your top tax rate is only 35%, you may get back $100,000 or more after filing your taxes.
Using Losses to Offset Winnings
If you have gambling losses for the year, you can use these to offset some or all of your lottery winnings for tax purposes. You report losses separately on Schedule A as an itemized deduction. This lowers your taxable gambling income. Keep detailed records like losing lottery tickets to support your losses claimed.
Getting Professional Help
Determining taxes on lottery winnings can be complicated, especially on large jackpots. Situations with multiple state claims, back taxes, family claims, etc. require tax guidance. Consulting a qualified tax accountant or attorney can ensure you pay only what is owed and avoid unnecessary penalties.
Minimizing Taxes on Jackpots
For large lottery jackpots, there are steps you can take to minimize taxes and maximize how much you keep:
- Choose the annuity rather than lump sum payout to spread taxation over multiple years.
- Contribute to retirement accounts to reduce your taxable income.
- Offset winnings with any gambling losses you can claim.
- Donate a portion to charity for a tax deduction.
- Claim prize anonymously if your state allows.
- Work with a tax expert to develop a smart tax strategy.
Taxes on Scratch Tickets and Small Prizes
For scratch tickets and other small lottery prizes under $600, there is no tax withholding or reporting requirement. However, technically you still need to report these small prizes as gambling income on your tax return. Most people skip doing so and the IRS does not enforce reporting of small prizes. But multiple small wins adding up to large amounts should be reported.
Record Keeping
Keep detailed records of all your lottery winnings and losses. This includes:
- Form W-2G issued for any prize over $600.
- Records of any federal or state tax withheld from prizes.
- Scratch tickets, losing draw game tickets, etc. to back up losses claimed.
- Receipts for any gambling expenses like travel costs.
Good documentation helps support figures reported on your returns and any claims for refunds or deductions. It also avoids issues if you are audited down the road.
Year-End Tax Planning
Look at your gambling winnings and losses for the year as it draws to a close. If you are showing a large profit, you may want to claim additional losses before December 31st to lower your taxable income. Having a tax professional review your situation can identify any last minute steps to implement.
State Tax Variations
Tax rules for lottery winnings differ across the states. Factors like local tax rates, tax deductions, credits, prepayments, and more can affect what you pay in your state. Some states offer special treatment for in-state lottery wins. Be sure to consult a tax pro familiar with your specific state and city for guidance.
The Bottom Line
Taxes on lottery winnings follow the same rules as regular income, but have unique withholding and reporting requirements. Small prizes under $600 generally don’t have taxes withheld upfront. But you still need to report these on your tax return along with any documentation. Once you understand the tax rates in your particular situation, it makes managing lottery taxes much simpler.