How Are Lottery Winnings Taxed in America?
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In the United States of America, you have access to some of the biggest lottery draws in the world. Mega Millions and Powerball pay out lottery jackpots worth hundreds of millions of dollars on a regular basis, but winners of these generous prizes must pay out a significant portion of their prize money in taxes with each state dictating its own requirements on how much money prize winners should part with.
Absolutely every lottery jackpot that is won in America worth over $5000 is subjected to a federal tax of 25%. This money is used to fund a wide range of government programs, including education grants. So, while it may seem unfair that a quarter of your winnings are being given to the government, you can rest assured that they are being used for a good cause.
On top of the federal tax, there is also a state tax. The amount of taxes you pay depends on the state in which you purchased the ticket and your state of residence. These taxes are allocated to government programs on a state level, rather than going to federal programs.
There are some states across America that do not charge taxes on lottery winnings. They are: Washington, Texas, Tenessee, South Dakota, New Hampshire, Pennsylvania, Delaware and California. The states with the lowest taxes (4% and less) are: Colorado, Missouri, Indiana, North Dakota, Oklahoma and Virginia.
Arizona, Illinois, Iowa, Kansas, Maine, Massachusetts and Nebraska charge a 5% tax on all lottery winnings. The states that charge the highest lottery taxes are: Washington, D.C., Oregon, New York, New Jersey and Maryland. Their lottery taxes exceed 8%, with New Jersey charging an enormous 10.8%.
Individual cities also benefit from lottery taxes. Compared to federal and state taxes, these are quite low. These tax rates rarely exceed 3%.
You can choose to accept your lottery winnings in a lump sum or in annuity payments, receiving installments on a yearly basis. Each of these options is taxed at 25%, but you should note that the lump sum total is always smaller than the total of the annuity payments.
So, a $20 million lottery prize will vary greatly depending on where it is won and how you choose to be paid. For example, if you win the lottery in California, your lump sum prize would be worth $11.25 million and your annuity payments would total almost $15 million by the end of 26 years. If you win the lottery in New Jersey, your lump sum would be worth $9.5 million and your annuities would be worth just over $12.8 million.
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