Lotteries are generally operated by states to generate revenue for a variety of uses. Most states use lottery proceeds to fund schools and infrastructure. The odds of winning a lottery are extremely low, usually in the tens of millions to one. However, the lucky lottery winners often receive millions of dollars, either in a lump sum or paid out over many years (annuity). The state and federal governments levy a high tax on lottery winnings. The typical federal tax rate could be as high as 39.6 percent, and the state tax rates could be as high as 8 percent. If you've won the lottery, or you're just dreaming about it, you're likely curious exactly how much you'll have after all of those taxes are taken out.
You can calculate the amount you actually won as part of a lottery windfall by identifying your current federal and / or state tax rate and deducting the necessary value from the winning sum.
Assessing Federal Taxes
To get started, you'll need to determine the amount of lottery money won and assume it is paid in a lump sum. If you have a lottery ticket in hand, look up the total amount of the jackpot, if you don't have it memorized. For instance, a lottery jackpot might be $20 million, but before it is paid out, taxes must be calculated and paid to the government.
Determine the federal tax rate for lottery winnings. Assume the maximum tax bracket is used and the rate is 39.6 percent. Multiply $20 million by 0.396 for a federal tax payment of $7,920,000. If you haven't won the lottery yet, keep that federal tax rate handy so that you can calculate the next time you head out to buy a ticket.
Evaluating State Taxes
Now it's time to calculate your state taxes on your $20 winnings. Determine the state tax rate for your own state when it comes to lottery winnings before you get started. For the purposes of this exercise, we'll say 8 percent. Multiply $20 million by 8 percent for a state tax payment of $1.6 million.
Determine the actual lottery amount won by subtracting the state and federal tax payments from the gross lottery winnings. This is $20 million minus $7,290,000 and $1,600,000 for an actual payout of $11,010,000.
In addition to taxes, you may also have to split your winnings if more than one person wins on the same jackpot. This is especially true of large multistate Powerball payoffs. You may find that you've won $20 million but you have to split that amount with two other winners, then lose taxes on your share. For that reason, you may not want to commit to spending your winnings until you've gotten final verification of how much you've won.
- How Stuff Works: What is the tax rate for lottery winnings?
- Kiplinger: How Much Tax You Will Pay on Your Lottery Winnings
- USA Today: 12 things not to do if you win the lottery
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Brian Baer has been writing since 1982. His work has appeared on Web sites such as eHow, where he specializes in technology, management and business topics. Baer has a Bachelor of Science in chemical engineering from the University of Arkansas and a Master of Business Administration from the University of Alabama, Huntsville.