In 2016, American lottery hopefuls spent approximately $80 billion dollars on a chance at changing their lives forever. However, few winners are ever prepared for what comes next. If you’re like many lottery winners, you might be wondering how much federal taxes you can expect to be withheld from your lottery winnings. The simplest answer is, it depends. While you still may be taxed at the state level for your earnings, any winnings more than $5,000 will likely trigger an automatic 25 percent federal tax withholding off the top before you see a dime of your winnings. How much you ultimately will owe depends on your filing status and tax bracket, and is due at tax time.
Understanding Tax Brackets
On the surface, most people are at least somewhat familiar with tax brackets, but there's also a lot of confusion and misconceptions surrounding them. Otherwise known as tax rates, these are the rates at which you’re taxed on any income. For IRS purposes, any lottery or gambling winnings are considered income, and as such, you may find yourself paying a higher tax rate or in a higher bracket. A common misconception is that once you reach a certain income, all of your income is taxed at the same rate. This is not the case. The tax rate is progressive, meaning the more taxable income you have, the higher tax rate you will pay on certain portions of it up to 39.6 percent.
For the 2017 tax year, there are seven tax brackets or tax rates that determine how your income is taxed. A portion of your income is taxed at each tax rate until it surpasses a certain threshold. When you exceed a particular tax bracket, any subsequent income higher than the previous bracket will be taxed at the higher rate until that threshold is surpassed, and so on until the 39.6 percent rate is reached. This means, all taxpayers with more income than those in the lowest tax bracket, are in fact paying taxes in two or more brackets.
The following list breaks down the 2017 tax rates, or brackets, that determine at which rate a particular portion of your income will be taxed:
10 Percent Tax Rate
- Single: Up to $9,325
- Head of Household: $13,350
- Qualifying Widow/er or Married Filing Jointly: $18,650
- Married Filing Separately: $9,325
15 Percent Tax Rate
- Single: $9,326 – $37,950
- Head of Household: $13,351 – $50,800
- Qualifying Widow/er or Married Filing Jointly: $18,651 – $75,900
- Married Filing Separately: $9,326 – $37,950
25 Percent Tax Rate
- Single: $37,951 – $91,900
- Head of Household: $50,801 – $131,200
- Qualifying Widow/er or Married Filing Jointly: $75,901 – $153,100
- Married Filing Separately: $37,951 – $76,550
28 Percent Tax Rate
- Single: $91,901 – $191,650
- Head of Household: $131,201 – $212,500
- Qualifying Widow/er or Married Filing Jointly: $153,101 – $233,350
- Married Filing Separately: $76,551 – $116,675
33 Percent Tax Rate
- Single: $191,651 – $416,700
- Head of Household: $212,501 – $416,700
- Qualifying Widow/er or Married Filing Jointly: $233,351 – $416,700
- Married Filing Separately: $116,676 – $208,350
35 Percent Tax Rate
- Single: $416,701 – $418,400
- Head of Household: $416,701 – $444,550
- Qualifying Widow/er or Married Filing Jointly: $416,701 – $470,700
- Married Filing Separately: $208,351 – $235,350
39.6 Percent Tax Rate
- Single: $418,001 or more
- Head of Household: $444,551 or more
- Qualifying Widow/er or Married Filing Jointly: $470,701 or more
- Married Filing Separately: $235,351 or more
Knowing Your Filing Status
Age and marital status are key determining factors in figuring which filing status applies to you. These filing statuses determine your tax rate, filing requirements, and any tax credits or deductions for which you’re eligible as well as standard deductions. Sometimes, you may find yourself eligible to file under two statuses at the same time. In this case, the IRS instructs you to select whichever status affords you the greatest deductions and tax benefits. If you’re unsure which status you fall under, the IRS website has helpful interactive tax assistant tools to help. It is with knowledge of your filing status, and income, that you determine how much of your winnings you can expect to be taxed.
Each of the five filing statuses has its own requirements, rules or tests that determine eligibility. It’s best to consult with a qualified tax preparer or advisor experienced with lottery winnings to assist in deciding the best way to go about your tax obligations. It is worth doing your homework and becoming familiar with the IRS website; it's a wealth of information on filing status, income from gambling and tax rates.
- Tax Foundation: 2017 Tax Brackets
- TaxAct: How Tax Brackets Work: 2017 Examples and Myth Busting
- IRS: What Is My Filing Status?
- efile: Choose Your IRS Tax Return Filing Status
- IRS: How Do I Claim My Gambling Winnings and/or Losses?
- IRS: Topic Number: 419 - Gambling Income and Losses
- CNN Money: You won the $1.5 billion Powerball! Here's your tax bill