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, and the IRS has an Interactive Tax Assistant tool on its website to help you as well.
If you win the lottery, you can expect to pay federal taxes on your winnings. The IRS considers winnings such as these to be taxable in keeping with federal guidelines. It is also important to note that your state of residence may also impose additional taxes on these funds.
How Much You Need To Win Before Having To File 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 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. Ten states including California, Florida and New Hampshire do not tax lottery winnings at all. 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 line 21. 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 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 2017, is 39.6 percent and 37 percent for 2018 filings. Single filers will reach this bracket at $418,400 or higher in winnings, and married couples who file jointly will find themselves in this bracket at $470,700 and higher in lottery earnings for tax year 2017. While 2018 single filers reach the highest bracket at $500,001, with married filing jointly couples taxed at the highest 37 percent tax rate when income reaches $600,001.
Lump Sum vs. Annuity Payments
Since 2003, only four lottery winners of large jackpots have chosen to accept annuity (annual) payments for their winnings instead of taking the money all at once. There are pros and cons to both options. 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 were you 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 for the lump sump and subsequent tax hit.
- IRS: Topic No. 419 Gambling Income and Losses
- IRS: How Do I Claim My Gambling Winnings and/or Losses?
- Tax Foundation: What Percentage of Lottery Winnings Would Be Withheld in Your State?
- IRS: About Form W2G
- Tax Foundation: 2017 Tax Brackets
- Washington Post: The best and worst states for winning the $1.5 billion Powerball jackpot
- Forbes: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
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- IRS. "Topic No. 503 Deductible Taxes." Accessed March 27, 2020.
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.