Played the lottery and won big? You’re probably wondering how you’ll spend all that money. However, Uncle Sam will want his cut first.
Lottery winnings are treated by the Internal Revenue Service as gambling winnings and are taxed as ordinary income. If you win the lottery, the total amount you owe in taxes depends on the state where you live. And more importantly, on whether you take the winnings as a lump-sum payment (one check for the full amount after taxes have been deducted) or an annuity (smaller annual payments that are paid out and taxable over time).
There’s no way you can avoid the federal tax on lottery winnings completely, but you may be able to reduce them by claiming deductions. Here’s what you need to know about lottery tax. Please remember that state and local income tax rules may vary, so it’s always best to seek help of our tax services In & Near Bronx, NY.
Unless the tax code specifies otherwise, most types of income are considered taxable by the IRS. The IRS will want a cut of lottery winnings since they are considered gambling winnings, which are taxed.
Lottery winnings can mean one of two things.
It’s either you pay taxes on all your winnings in the year you receive them – for winnings paid out as a lump sum.
Or, you’ll only be taxed annually on the amount you receive if you receive winnings as an annuity.
Take note: Interest on unpaid annuity installments must be included in your gross income for the tax year in which you receive it.
If you win $600 or more, the lottery agency is required to give you Form W-2G, which you have to submit with your federal income tax return if the agency withheld federal income tax from your winnings.
Moreover, whether you’re dealing with Powerball tax, lotto tax, or mega millions taxes, the lottery agency has to send a copy of this form to the IRS if your winnings exceed $600, so it is important to report your winnings on your tax return accurately.
The IRS requires you to report your lottery winnings (or other gambling payouts) on your federal tax return, even if you don’t receive a W-2G.
Getting a huge financial windfall can change your life, but it doesn’t change everything – you’ll still need to pay taxes and bills. When you strike it big, it’s essential to know about taxes on gambling winnings because they can reduce the amount of money you ultimately receive.
Winning the lottery generally increases your income, regardless of whether you accept it in a lump sum or receive payments over time. Since taxes are calculated based on your taxable income for the year, if your lottery winnings put you in a higher bracket, the federal tax rate increases, and you’ll have to pay more.
You could owe additional tax, interest, and penalties if you fail to report taxable income (including lottery winnings) on your tax return.
Depending on the state you live in, you may have to pay state and local taxes on lottery winnings in addition to federal taxes.
To begin with, lottery agencies have to withhold 24% of winnings over $5,000 to the federal government. However, depending on your tax bracket, there may be a discrepancy between the mandatory withholding amount and the lottery tax you’ll ultimately owe the IRS.
If the government withheld too much tax from your lottery winnings, you might receive a refund at tax time when your lottery winnings don’t increase your tax bracket.
Lottery winnings and taxes on gambling winnings are different in every state. As an example, if you live and win in New York, you will have 8.82% of your winnings withheld by the state in addition to the 24% withheld by the federal government.
There are seven states that don’t have income taxes, so big winners in these states won’t have to pay state taxes on prize money. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Some other states don’t have a state lottery at all.
Additionally, California, New Hampshire, and Tennessee exempt their state lottery winnings from state income taxes. But if you want to play the lottery in a different state than New York, be sure to check the rules so that you are aware of any taxes that might apply. And if you’re in New York, especially in Bronx, NY, visit our tax office and talk to one of our enrolled agents.
Depending on factors such as state lottery rules and how much you won, you may be able to choose a lump sum or an annual payment plan for your lottery payout. Regardless of the type of payout, here’s how the federal tax on lottery winnings will be affected.
When receiving your winnings in a lump sum, you might find yourself in the highest tax bracket for the year you win. In other words, if you win a large amount, your income over a certain threshold ($523,601 for single taxpayers and $628,301 for married couples filing jointly for 2022) would be taxed at 37% by the IRS.
For example, if you are single and have a taxable income of $40,000 and win a $1 million lottery, your total taxable income would increase to $1,040,000 for the year if you take the payout as a lump sum. Your federal tax rate would be 37% on the portion over $523,601. However, all the lower tax rates would apply to portions of your income that fall below that threshold.
Your tax bracket will also likely change depending on your income, but the impact is less immediate.
The annuity payments such as Powerball annuity would probably allow you to be in a lower tax bracket each year, resulting in a lower federal tax rate.
The IRS expects you to report it on your tax return as income if you win the lottery. Whether you receive a lump sum or a series of annual payments, Uncle Sam is going to want a piece of the action. Fortunately, you can find ways to offset the additional taxes you must pay due to winning the lottery.
You can deduct certain dollar amounts from your adjusted gross income or AGI if you meet certain IRS requirements. This lowers your taxable income, which in turn can put you in a lower bracket. Here are two possible deductions you could lose in different situations like sports betting taxes and casino winnings tax and even for taxes on gambling winnings:
If the organization is a qualified tax-exempt organization, you may be able to deduct the value of your charitable contributions from your income. However, there are certain conditions and limits. Cash donations, for example, can be deducted only if they are less than 60% of your AGI.
As long as the losses don’t exceed the winnings you report as income; you can deduct your gambling losses (such as the cost of lottery tickets you didn’t win). As an example, if you earn $2,000 in winnings, but you lose $2,500, you can deduct up to what you lost.
The best thing you can do with your winnings at first is nothing. Take your time to see how this windfall affects you financially. Seek tax help from professionals in & near Bronx, NY to develop a financial plan based on your income to help you save that money. Whatever your winnings may be, they aren’t endless. Therefore, if you want to have enough money for the rest of your life, you should make smart investments.
SCL Tax Services in & near Bronx, NY, offers a wide range of tax services, accounting, and bookkeeping to individual taxpayers and businesses. If you have any questions about taxes on gambling winnings or sports betting taxes, our tax professionals are ready to help. Give us a call at +1-347-305-4348 and make use of our free 15-minute tax consultation!
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