Lottery Taxes & Withholdings EXPLAINED!

By: Jared James, Founder

Transcript Below Video

Hi and welcome this is Jared the Founder here at LottoEdge. Today I want to answer a question we see a lot from lottery winners or lottery hopeful winners. And that is how much will I pay in taxes if I win the lottery?

Let me start off this video by saying this is not financial advice because every state varies and everyone’s unique tax situation is different. This is just going to be general guidelines so make sure you still consult your tax preparer or accountant to help with your situation.

All right let’s go ahead and dive in here. And I want to start off by clearing up what we mean by tax withholdings and what are tax withholdings actually for.

If you win any amount in the lottery, you’re supposed to report those winnings for income tax purposes. No one’s actually tracking your small wins that you claim for $20 or $100, but technically you’re supposed to be paying taxes on those winnings as well and report those when it comes income tax time.

What tax withholdings are for is, you know, state and federal tax authorities assume that you’re going to be able to pay the taxes on those smaller amounts you won when you do report them on your taxes. But if you win bigger not every player is going to be responsible enough to set aside money to pay those taxes on their winnings come tax time.

And this is where withholdings come in. So basically, a state lottery will hold back estimated taxes due on your winnings and pass those along to the tax authorities for you. That way when tax time rolls around and you report let’s say $100,000 in winnings on the lottery, you don’t have to worry about having overspent your money because the government already has a good portion of your tax money set aside for the taxes you owe anyway.

It’s basically a way to make sure that winners pay what they owe and they don’t have to chase people down if they were to overspend their winnings and don’t have the money available to pay their taxes.

All right, so how much are these actual tax withholdings?

For many states they rely on the federal income tax guidelines for withholding purposes. And if we take a look at the IRS they actually have a section related to lotteries and how much to be withheld. And what this tells us is for income tax purposes, they want state lotteries to withhold taxes on any amount over $5,000, and that’s net amount.

And what they mean by that is let’s say you won $5,010 but the ticket cost you $50 dollars. Well, if you subtract the cost of your ticket from your winnings it falls less than the $5,000 threshold. So you’re able to subtract off the cost of the ticket from your winnings.

Now that doesn’t come and play a lot so usually if you’re going to hit the threshold you know you’re going to have those withholdings but if you come in right at $5,000 you may be able to get away without having those withholdings if you didn’t want them if the cost of the ticket  has not been included there.

One other thing to note is you have to be able to prove that are a citizen and you have let’s say a Social Security number. If for some reason you aren’t able to provide some type of document stating that, they actually have to withhold more money.  And in that case, any amounts of $600 or more they have to hold withholdings on those as well.

As long as you can provide your social security number and prove you’re a citizen, that won’t kick in until you win more than $5,000.

All right now remember even if you didn’t meet the threshold to have these withholdings, you still have to pay taxes on your winning. States are still going to report to the federal, state, and local tax authorities any prizes that they have a record of.

Typically if you have to go to a lottery claim center and claim you know $600 or more they’re going to report that to the tax authorities and so when tax time comes around you still have to report that on your income taxes and still pay taxes on it.

It just means they didn’t withhold some of that money back to pay the taxes on behalf of you. You’re going to have to pony up that money come tax time.

Again keep in mind smaller prizes that you claim at a lottery retailer technically should be claimed on your taxes but no one’s tracking that so it’s purely your responsibility to report those winnings.

Okay let me talk real quick here about the three major withholding categories that you may experience when you make a larger lottery claim. Now the first one is what we just talked about, federal income taxes.

Again these are for amounts greater than $5,000 and what they’re going to withhold is 24% of that amount is going to be withheld for federal income tax purposes.

Second grouping will be state income taxes.  Now this will vary by state. Some states like, let’s say Florida, doesn’t have a state income tax so nothing is going to be withheld from your money for state income tax purposes.

But for a state like maybe, Georgia, they’re going to withhold an extra 5.75% for state income tax purposes. Again, this is going to vary by state and it’s going to be a lot less than the federal amount.

But let me add a quick Pro tip in here for you. You can save losing lottery tickets and those will help offset your winnings and help reduce your tax bill.

So you can just set aside an old shoe box or a little box and anytime you have a losing ticket throw it in that box and if for some reason you have a larger claim that comes in, you can potentially offset some of that winnings with these losses that you have and your documentation is these losing tickets. Because you don’t get a receipt when you buy a lottery ticket, you need to have those extra tickets.

Now if you don’t use them at the end of the year you can toss them and start over again next year collecting those tickets each year and if you have a big win, you can offset some of those winnings. And you can claim up to the amount of your winnings, but you can’t claim more. If you had more losses on your tickets than you did in winnings, you’re out of luck and you only can claim up to the amount of your winnings.

The third bucket I just want to mention real quick where you may have a withholding on is some states if you have let’s say you owe back taxes or back child support. And again, this will vary by state, but they may withhold some money for those.

Now this does not impact most people that probably don’t have these withholdings that would come into play but it’s just something to note if you did have any type of back withholdings. It’s a great chance to use your winnings to pay off those debts that you have.

All right I’m going to pull all this information together and walk you through a couple examples so to kind of help you understand here. Let’s just say we won a $1,000.  So the threshold in most states here it’s not going to trigger withholding.

From a federal income tax purpose, they say nope, you didn’t meet the withholding threshold and in most states are going to say the same thing. But remember that state lottery is going to report your $1,000 winnings to the federal and state tax authority so when tax time rolls around, you’re going to still need to claim it on your taxes and pay the applicable taxes at that time.

It’s a good idea to set aside you know 24% for federal taxes and some money for state taxes. Because even though they didn’t withhold it you’re going to still have to pay it later down the road.

Now let’s take a second example here, let’s say you won $10,000. You definitely are going to trigger withholdings here. And again the withholdings, it’s just money they’re setting aside so you don’t come up short when tax time rolls around.

And where this is where we’re going to see that 24% being taken out for federal tax withholding, so about $2,400 they’re going to withhold and you know pass it along for federal taxes on your behalf. And the same thing may happen for state taxes but again that’s going to vary by state.

You know in Florida again, if you had a $10,000 win, they’re not going to withhold anything but in a state like Georgia we talked about before where it’s 5.75%. They would hold back an additional $575 to cover those taxes on your behalf.

Now of course they’re going to give you documentation of your winnings and how much money they withheld. And so, you’re going to need all that documentation come tax time. But again, they’re just holding that money back so you don’t come up short when tax time does roll around.

All right, so lastly let me add one more thing here. Remember I mentioned before save your losing tickets. And bringing that into play here, if let’s say we had $2,000 in our shoe box or our box of losing tickets over the course of the year.

When tax time rolls around and we claim our $10,000 winnings, we can say hey, I have $2,000 in losses and I want to offset some of that of my winning. When tax time comes you actually only will then claim a net of $8,000 in winnings. Your $10,000 you won, less your $2,000 in losses.  

And in this case if you had, you know money withheld from you on the $10,000, you may actually get a refund of some of that money for the taxes already withheld. But if you didn’t have that shoe box of your losing tickets, you’d have no way to prove that you had the $2,000 in losing tickets and you’d be paying taxes on the full $10,000 winnings.

All right, I know this was a lot of detailed information when it comes to taxes and stuff but again check with your tax preparer. This is just a good guideline of how much will be withheld if you won.

If you have some general questions drop us a line, we’re happy to help. Thanks for tuning in.