Whether you win the multi-million dollar lottery jackpot or just have some modest scratch-off ticket winnings, the amount of tax you'll pay on lottery prizes will depend on a number of factors, most notably, the amount of the prize, how much you spent on those not-so-lucky lottery tickets during the year and the amount of your other income.
Any money you win through the lottery will be taxed according to federal income tax rates. With that in mind, the amount of money you have already earned through the year as income will directly affect the amount of tax you pay on your lottery winnings, as it is all considered personal income upon receipt.
Taxes on Casino Winnings and Lottery Winnings
You may not always end up paying tax on your gambling and lottery winnings, but you'll never know until you report it on your tax return – which the IRS requires. Because the federal government imposes progressive tax rates – meaning different parts of your income are taxed at varying rates – the amount you'll owe on a lottery prize may be different from what another person may pay for the same prize. Ultimately, it's the tax rate for the highest tax bracket you're subject to that dictates how much you'll have to pay.
State lottery agencies may have to report your winnings to the Internal Revenue Service on Form W-2G and withhold 25 percent for income taxes if you win more than $5,000, so taxes on $5,000 lottery winnings are likely zero, but you will have to pay taxes on a $10,000 prize. Like with the W-2 you receive from an employer, you'll need to attach a copy of the W-2G to your Form 1040 tax return. However, state lottery agencies will only send you a W-2G if the prize is $600 or more and is at least 300 times the wager you placed. Therefore, if your prize is $600, you'll only receive a W-2G if the ticket cost you $2 or less. Regardless of whether the amount of your lottery prize requires a W-2G form, you still must report all winnings for taxes purposes.
You Can Deduct Gambling Losses
To reduce the income tax on your lottery winnings, the IRS allows a deduction for your annual gambling losses. To take advantage of this, you have to itemize on Schedule A. You report gambling losses as a miscellaneous expense, which isn't subject to the 2 percent adjusted gross income reduction. If your losses exceed your lottery winnings, the maximum deduction you can take is equal to the lottery and other winnings reported on your tax return. For example, if you spent $1,000 on lottery tickets during the year and only won $600, you can take a $600 gambling-loss deduction to avoid all tax on the winnings, but the excess $400 in losses are nondeductible.
Because the IRS may ask for proof of the lottery and other gambling losses deducted on your return, it's a good idea to keep accurate records of your annual lottery and other gambling wagers and winnings. For the lottery, the best way to prove your losses to the IRS, if necessary, is to have all of your losing tickets available.
2018 Tax Brackets
Lottery winnings are taxed as ordinary income, so the amount of tax you pay on your winnings will depend upon your tax bracket. For the 2018 tax year, the brackets have changed under the Tax Cuts and Jobs Act, and if you win the lottery during 2018, the taxes you file in 2019 will reflect these new brackets.
The new tax brackets for a single person are as follows:
- 10 percent of taxable income from $0 to $9,525
- 12 percent of taxable income from $9,526 to $38,700
- 22 percent of taxable income from $38,701 to $82,500
- 24 percent of taxable income from $82,501 to $157,500
- 32 percent of taxable income from $157,501 to $200,000
- 35 percent of taxable income from $200,001 to $500,000
- 37 percent of taxable income from $500,001 and beyond
If you file as single for the 2018 tax year and you have a salary of $50,000, your first $9,525 in income will be taxed at 10 percent; the next $3,501 will be taxed at 12 percent; and the rest will be taxed at 22 percent. Since you're in the 22 percent tax bracket, your lottery winnings will be taxed at 22 percent. If your state lotto agency withheld more, the difference will be applied to your total tax due. If your regular salary is $100,000, you're in the 24 percent tax bracket, and you'll pay more tax on your lotto winnings than someone who makes less. If your lotto winnings push your income into another tax bracket, you'll pay that on amount on whatever portion exceeds the bracket's baseline. So if you normally make $100,000 per year and are in the 24 percent tax bracket, but you win $100,000 in the lottery, your income is pushed into the 32 percent tax bracket for amounts in excess of $157,500, and so $42,500 of your winnings will be taxed at 32 percent.
2017 Tax Brackets
For the 2017 tax year, the tax brackets for a single person are as follows:
- 10 percent of taxable income from $0 to $9,325
- 15 percent of taxable income from $9,325 to $37,950
- 25 percent of taxable income from $37,950 to $91,900
- 28 percent of taxable income from $91,900 to $191,650
- 33 percent of taxable income from $191,650 to $416,700
- 35 percent of taxable income from $416,700 to $418,400
- 39.6 percent of taxable income from $418,400 and beyond
As an example, suppose you file as single person during the 2017 tax year when the 10 percent tax bracket applies to your first $9,325 of income, with amounts more than $9,326 up to $37,950 being subject to the 15 percent bracket. Therefore, if your taxable income, not including a $10,000 lottery prize, is $15,000, your lottery winnings would be taxed in the 15 percent bracket. In other words, you'll owe $1,500 in tax.
- IRS: Tax Topic 419 –- Gambling Income and Losses
- IRS: Instructions for Forms W-2G and 5754
- Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- IRS. "Instructions for Forms W-2G and 5754 (2020)." Accessed March 27, 2020.
- IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed March 27, 2020.
- Tax Foundation. "Taxes in New York." Accessed March 27, 2020.
- The Tax Foundation. "State Individual Income Tax Rates and Brackets for 2020." Accessed March 27, 2020.
- Oregon Secretary of State. "Government Finance: Taxes." Accessed March 27, 2020.
- MoneyManagementInternational.org. "How Much Does Winning the Lottery Cost You?" Accessed March 27, 2020.
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- IRS. "Topic No. 503 Deductible Taxes." Accessed March 27, 2020.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.