If you are lucky enough to win $5,000 from the lottery, you will have to pay taxes on those winnings. The amount of tax you owe will depend on a few factors, but you can generally expect to pay about 25% of your prize money in federal tax, plus possibly some additional state and local taxes depending on where you live.
Federal Tax on Lottery Winnings
At the federal level, lottery winnings are considered ordinary income by the IRS, just like your wages from a job. That means your prize money will be subject to federal income tax at your regular rate. If you win a lottery prize of $5,000 or more, the lottery administrator will withhold 24% of your winnings automatically for federal taxes before paying you the balance.
So if you win $5,000, you can expect $1,200 (24% of $5,000) to be withheld upfront, leaving you with a check for $3,800. You will still owe taxes on the full $5,000 though. When you file your federal tax return for the year you won, you’ll have to report the full $5,000 in winnings and pay any additional tax you owe based on your total income and regular tax rate.
For example, if you are a single filer with $50,000 in taxable income excluding your lottery winnings, your federal tax rate on the $5,000 prize would be 22%. So you would owe $1,100 on the winnings ($5,000 x 22%). Since $1,200 was already withheld, you would get a $100 refund when you file your return.
State Tax on Lottery Winnings
In addition to federal tax, many states also tax lottery winnings. Rules vary by state, but lottery prizes are fully taxable as ordinary income in most jurisdictions. Some states automatically withhold state taxes when you claim a lottery prize, while others require you to make estimated payments or settle up when you file your state return.
State tax rates on lottery winnings range from zero in states with no income tax like Florida, Texas, and Washington, up to nearly 10% in some high-tax states. California, for example, taxes lottery winnings at the same rates as regular income, up to 13.3% at the highest bracket. New York tops out at 8.82%. Your home state taxes will apply no matter where you bought the winning ticket.
To estimate how much you will owe in state taxes on a $5,000 lottery prize, check your state’s income tax rates and multiply the rate for your income bracket by $5,000. This will give you a ballpark figure to plan for. You may end up owing a bit less if you have other deductions that reduce your state taxable income.
Other Taxes on Lottery Winnings
A few other taxes may apply to lottery prizes in some cases:
- Local income tax: Some cities and counties levy additional local income taxes on top of state taxes. If you live or win a lottery prize in an area with local income tax, you’ll also owe tax on the winnings to that jurisdiction.
- Gift tax: If you give away your lottery winnings or use them to make large gifts to others, you may owe federal gift tax on amounts above $15,000 per person per year.
- Estate tax: Value from lottery winnings you still hold at the time of your death gets included in your taxable estate for federal estate tax purposes.
However, most lottery players will just need to worry about basic federal and state income taxes on their winnings.
Claiming Lottery Prizes
To collect lottery winnings, you’ll need to follow the claims process set by the lottery administrator. For major nationwide lotteries like Powerball and Mega Millions, this involves filling out a claim form and verification at a designated lottery office. State lotteries have similar procedures.
You’ll need to provide your Social Security number and tax ID information so required taxes can be withheld. Make sure to bring valid photo ID and your winning ticket. Some lotteries require you to claim in person, while others allow authorized agents to claim on your behalf.
For smaller prizes that can be claimed at retail locations, you’ll still need to fill out a form for tax reporting purposes. No taxes are withheld on smaller prizes, but you are still responsible for reporting and paying applicable taxes when you file your return.
Getting a Tax Refund on Lottery Losses
Since lottery winnings are taxed as ordinary income, can you deduct lottery losses? Unfortunately, you cannot write off losing lottery tickets as a tax deduction. The tax code prohibits deducting gambling losses in excess of gambling winnings. So lottery losses only offset lottery wins for tax purposes.
If you win $5,000 in one lottery during the year but buy $10,000 worth of losing tickets in other lotteries, you can only deduct $5,000 of those losses against your winnings. You cannot use the extra $5,000 in losses to lower other taxable income.
You also cannot carry forward lottery losses to future years. Losing lottery tickets are basically worthless from a tax perspective, unless you have some winning tickets as well in the same year.
Paying Estimated Tax on Lottery Winnings
Since a portion of your lottery winnings will not have taxes withheld upfront, you may need to make estimated tax payments to avoid penalties. Federal and state estimated taxes are typically paid quarterly based on your expected total tax bill for the year.
You can use IRS Form 1040-ES and equivalent state forms to calculate and pay estimated taxes. These payments can help cover your tax liability on winnings that slip through withholding. That way you don’t get stuck with a big tax bill when you file your return.
Reporting Lottery Winnings
Remember, you are responsible for reporting all lottery winnings on your tax return regardless of whether taxes were withheld initially. The lottery administrator will provide you with a Form W-2G showing the amount you won and any federal and state taxes withheld.
You’ll need to attach Form W-2G to your return. Your winnings get reported as “Other Income” on Form 1040. Any withholding from the W-2G will be credited against the tax you calculate. Make sure to keep records of all winning and losing tickets in case they are needed to prove deductions.
Getting Help with Taxes on Lottery Winnings
Figuring taxes on lottery prizes can be complicated, especially if you have winnings from multiple sources or need to allocate taxes across state lines. A tax professional can offer guidance on reporting winnings, claiming deductions, and reducing your tax liability.
An accountant or enrolled agent can also help you plan your withholding and estimated payments properly so you don’t get hit with penalties. If you win a particularly large lottery prize, it’s a good idea to assemble a team of financial and legal advisors to make sure you handle taxes appropriately.
Frequently Asked Questions
Do I have to pay taxes if I win the lottery?
Yes, lottery winnings are considered taxable income, so you must report the prize money and pay applicable federal and state taxes. A portion is withheld upfront, but you are responsible for additional taxes when you file your return.
Can I avoid paying taxes on lottery winnings?
There is no legal way to avoid paying taxes on lottery prizes. Lottery winnings are fully taxable at your normal income tax rates. Attempting to evade taxes on winnings is illegal.
What if my state doesn’t tax lottery winnings?
You will still owe federal tax on the prize money, even if your particular state does not levy its own tax on lottery winnings. Currently, 24 states + Washington D.C. exempt state taxes on lottery prizes.
Do I have to claim lottery prizes under a certain amount?
You need to report all lottery winnings, no matter how small, on your federal tax return. For large prizes over $600, taxes are withheld automatically. If you win less than that amount, you’ll need to account for any tax due yourself.
What if I share a jackpot with other people?
If you split a lottery prize with a group, partnership, or lottery pool, you are only responsible for paying taxes on your share of the winnings. You would receive a Form W-2G from the lottery showing just your portion.
