While many dream of hitting those winning lotto numbers and changing their lives forever, few are adequately prepared for everything that comes with such a windfall. Even if you don't win big, the question "If I win the lotto, do I have to file a tax return?" inevitably arises.
The IRS is rather clear when it comes to declaring gambling winnings and losses, but the process can seem a bit complicated nonetheless. Hiring a tax adviser or preparer who is familiar with lottery filings will prove invaluable in helping you pay the IRS prize tax. Also, the IRS has an Interactive Tax Assistant tool on its website to help you as well.
Winning Thresholds for Filing Taxes
Although lottery winnings over $5,000 are generally subject to automatic federal and possibly state withholding, you must list all winnings (regardless of amount) on your tax return. These winnings are considered income for tax purposes, and may be subject to the IRS prize tax. So, you are required to declare any winnings when filing taxes – even if they are not automatically withheld.
Because lottery winnings are taxable income, at the very least you can expect to be taxed at the federal level. You may also pay a tax on winnings at both state and local level, too. Some states levy a flat percentage tax, while others tax you depending on the amount you won.
Some states – including Wyoming, California, Delaware, Texas, Florida, New Hampshire, South Dakota, Tennessee, and Washington – do not tax lottery winnings at all. And neither do the U.S. Virgin Islands and Puerto Rico. So, check with your state tax board for more information on whether you can expect to be taxed on your lottery earnings beyond the federal level.
Filing the Right Forms
When you win the lottery, you have to claim these winnings on Form 1040 as “Other Income” on the line labeled “8”. Payers will also issue you a Form W-2G, Certain Gambling Winnings, for your lottery earnings.
This is where a tax professional experienced in assisting lottery winners will come in handy. They can help you navigate the ins and outs of this often confusing IRS prize tax process if you've never filed this type of tax return before.
You do need to keep in mind, however, that the IRS does not have a straight 25 percent tax on lottery winnings, as is often rumored. Because your winnings are taxed as earnings, lotto winnings can be taxed up to the highest bracket, which for tax year 2021 is 37 percent.
Single filers will reach this bracket at $523,600 or higher in winnings, and married couples who file jointly will find themselves in this bracket at $628,300 and higher in lottery earnings for tax year 2021. While 2022 single filers reach the highest bracket at $539,900, with married filing jointly couples taxed at the highest 37 percent tax rate when income reaches $647,850.
Lump Sum vs. Annuity Payments
Most lottery winners tend to take the lump sum payout instead of an annuity that usually pays out over about 30 years. Taking your money in a lump sum will inevitably equate to a much higher tax hit than annual payments, but both options will invariably land you in a higher tax bracket.
Because your winnings are considered earnings for tax purposes, a $300 million jackpot, for instance, would be treated as if you earned that much in a single tax year – and you'd pay a tax on the lotto winnings accordingly. Annual payments allow for the taxation of your earnings to be spread out over the lifetime of your payout, which means you would pay less than if you were taxed on the full amount of your winnings all at once.
While annual payments allow you time to make wise investment choices and afford you some security, most large jackpot winners opt to deal with the IRS prize tax hit.That's because they get more control over the money.
- IRS.Gov: Interactive Tax Assistant (ITA)
- IRS.Gov: Instructions for Forms W-2G and 5754
- AARP: 9 States That Don't Have an Income Tax
- KIRO7: How Much Money Will You Get After Taxes if You Win the Mega Millions Jackpot?
- IRS.Gov: IRS provides tax inflation adjustments for tax year 2021
- IRS.Gov: IRS provides tax inflation adjustments for tax year 2022
- CNBC: Mega Millions jackpot surges to $370 million. Here are tips for handling the windfall if you win
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.