Have you won the lottery or fancy your chances of winning? In that case, it would be wise to prepare yourself for the taxes ahead. Otherwise, the federal tax on lottery winnings may end up shocking you.
So, what is the tax rate on gambling winnings at the federal level? Well, it depends on various things. The general rule of thumb is to withhold 24 percent of winnings for federal taxes. But in the end, the amount you win, how you get your winnings, how you file your taxes and where you live all have a role to play concerning how much you end up with.
Therefore, you need to consider all the factors that affect your winnings so you can ensure you pay off what you owe before spending the rest.
Federal Tax on Lottery Winnings
Below are the primary factors that affect the taxes you will owe on your lottery winnings.
1. How Much You Win
The size of your winnings will affect which income bracket you fall into. Remember, your gambling income will be added to your other income and the total may be much larger than you anticipate.
The more money you win, the higher the tax rate you will be subjected to. So, even though you are expected to withhold 24 percent for federal taxes, if you win a lot of money, you may end up in the highest income bracket and be subjected to the 37 percent marginal tax rate.
For the tax year 2021, there are seven tax brackets, which include 10, 12, 22, 24, 32, 35 and 37 percent, which are applied progressively as you win more. For example, if your gambling income pushed your total income to $80,000, you would be taxed up to 22 percent if you're filing single. But if your winnings increased your total income to $550,000, you will be taxed up to 37 percent.
2. Filing Status
Your filing status has a huge role to play in your taxes. Single taxpayers tend to have lower tax bracket limits, while those filing joint returns enjoy a higher limit.
For example, single taxpayers who earn gambling income of over $86,375 but below $164,925 will be firmly in the 24 percent tax bracket for the 2021 tax year. And yet, couples filing joint returns will enjoy higher limits anywhere from $172,750 to $329,850 and be subjected to the same top marginal tax rate.
In addition, your filing status will influence the amount you can claim as tax deductions. For the tax year 2021, single taxpayers can claim a standard deduction of $12,550 while couples filing jointly can claim $25,100. On the other hand, heads of households are permitted to claim $18,800 as standard deductions.
3. Payment Methods
You can choose to get your lottery winnings either as a lump sum or in the form of an annuity. This option is usually offered for large winnings. And most people tend to opt for the lump sum.
Unfortunately, your winnings will be taxed in the year you receive them. So, if you accept a lump-sum payment, you are more likely to be subjected to the highest possible marginal tax rates.
On the other hand, if you opt for an annuity, your taxable gambling income will be distributed across several years, which may be 20 to 30 years. In that case, you may end up owing less in taxes overall since you will claim deductions every year and be subjected to lower marginal tax rates.
4. Your State
Some states tax lottery winnings, while others don’t. And some tax only residents in their states, while others don’t. As a result, what you receive after paying both local and federal taxes will vary.
California, Delaware, New Hampshire, Florida, Pennsylvania, Puerto Rico, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Washington and Wyoming will not charge you state taxes on your winnings, thus allowing you to only pay taxes at the federal level.
For these reasons, you need to find out the local rules on gambling winnings so you don’t end up getting in trouble for paying less than you owe. If you are not sure about how much you will owe in taxes based on your state, you could use the TaxAct lottery calculator to get an estimate.
Read More: Tax Tips for Claiming Gambling Income & Losses
You can report your gambling winnings on Form 1040 or Form 1040-SR as “other income.” And if you choose to itemize and claim gambling losses, be sure to complete Schedule 1. If you have no idea of some of your numbers, use Form W-2G the lottery payer issues to complete your tax returns.
Read More: Form 1040: What You Need to Know
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.