Winning the lottery can be life-changing, but Uncle Sam still wants his cut. While federal taxes apply to lottery winnings in every state, some states don’t tax lottery winnings at the state level. This means lucky winners in those states get to keep more of their prize money.
States With No Taxes on Lottery Winnings
Currently, there are 8 U.S. states that do not tax lottery winnings:
- Florida
- Texas
- Washington
- Tennessee
- South Dakota
- Wyoming
- New Hampshire
- Alaska
These states do not levy any state income taxes at all, which includes taxes on lottery winnings. However, lottery winners in these states still have to pay federal taxes on their prizes.
Do All States Tax Lottery Winnings?
No, not all states tax lottery winnings. In addition to the 8 states above with no income taxes, 2 more states do not tax lottery prizes:
- California
- Delaware
So out of the 50 states, a total of 10 do not tax lottery winnings at the state level. The remaining 40 states and the District of Columbia all tax lottery prizes in some form.
States With the Highest Taxes on Lottery Winnings
Among states that do tax lottery winnings, tax rates vary greatly. Some of the highest state tax rates on lottery prizes include:
- New York – 8.82%
- Maryland – 8.95%
- Arkansas – 7.20%
- Minnesota – 9.85%
- Oregon – 8% or 9% depending on income
Winners in these states forfeit nearly 10% or more of their jackpots just to state income taxes. When combined with federal taxes, the overall tax burden can be quite significant.
States With No Income Tax That Tax Lottery Winnings
Strangely enough, some states with no broad-based income tax still tax lottery winnings. These include:
- Florida
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Each of these states exempts lottery winnings from its tax code. However, they wanted to recoup some revenue from jackpots won in their states. So they carved out special taxes that apply specifically to lottery prizes.
Florida
Florida taxes lottery winnings over $5,000 at a rate of 25%. This tax applies to any Florida lottery game, including Powerball and Mega Millions.
South Dakota
South Dakota taxes lottery prizes over $2,000 at a rate of 2%. This tax was enacted in 1987 specifically to recoup revenue from lottery winners.
Tennessee
Tennessee taxes lottery prizes over $5,000 at a rate of 3%, with taxes withheld directly by the Tennessee Lottery before prizes are awarded.
Texas
Texas taxes lottery winnings over $5,000 at a rate of 25%. Some county and municipal taxes may also apply to Texas lottery prizes.
Washington
Washington taxes lottery prizes over $500 at a rate of 10.9%. Certain gambling and lottery losses can be deducted against winnings.
Wyoming
Wyoming taxes lottery winnings over $600 at a flat rate of 6%, with taxes withheld by the state before prizes are paid out.
States With Different Tax Rates for Residents vs. Non-Residents
Some states tax lottery winnings for non-residents differently than for residents. Notable examples include:
- Kansas – 6.5% tax for residents vs. 5% tax for non-residents.
- Maryland – 8.95% tax for residents vs. 8% tax for non-residents.
- New York – 8.82% tax for residents vs. 8.5% tax for non-residents.
A handful of other states also tax non-resident lottery winners at slightly lower rates. This may be done to incentivize non-residents to play lotteries in their states.
States With Different Thresholds for Taxing Lottery Winnings
Many states only tax lottery winnings above a certain dollar threshold. This threshold varies by state, with some examples below:
| State | Tax Threshold |
|---|---|
| Kansas | $5,000 |
| Maryland | $5,000 |
| Michigan | $300 |
| Minnesota | $600 |
Many states specifically wanted to avoid taxing small or casual lottery players. So they set tax thresholds high enough to exempt minor prizes. This encourages lottery participation while still recouping taxes from major jackpot winners.
States With Differing Tax Rates Based on Lottery Game
Some states tax different lottery games at different rates. For example:
- Arizona – 5% tax on federal and state lottery winnings, 4% tax on tribal lottery winnings.
- Maine – 5% tax on Tri-State Megabucks and Hot Lotto winnings, 7% tax on all other games.
- Oregon – 8% tax on winnings up to $1 million, 9% on winnings over $1 million.
States may offer preferential tax rates to promote certain lottery games over others. Or some states honor tribal sovereignty by taxing tribal lottery winnings differently.
Tax Deductions Available for Gambling Losses
In some states, taxpayers can deduct gambling losses against any lottery or gambling winnings. This reduces overall tax liability from prizes. For example:
- Massachusetts – Gambling losses can be deducted against lottery winnings on state tax returns.
- New Jersey – Net losses up to the amount of winnings can be deducted from lottery winnings for state tax purposes.
- Wisconsin – Gambling losses can be deducted against lottery or gambling winnings on state returns.
Many other states allow similar deductions or credits for gambling losses. This can provide a much-needed tax offset for prolific lottery players who accumulated losses over time.
How Lottery Winnings Are Taxed
For lump sum lottery prizes, taxes are often immediately withheld at the state and federal level before winnings are distributed. Amounts vary based on the winner’s residency and other factors.
For multi-year annuity prizes, taxes are withheld annually on each payment. Again, exact withholding depends on the state and IRS rules at the time.
Lottery winners are responsible for declaring any winnings on their tax returns. Additional taxes may be due if insufficient taxes were withheld up front. Or winners may receive refunds if too much tax was withheld.
State Tax Withholding
State lottery agencies automatically withhold state taxes on lottery winnings above certain thresholds. Withholding rates vary based on the state. Some states with no broad-based taxes still withhold taxes specifically on lottery payouts.
Federal Tax Withholding
For very large lottery prizes, the IRS requires 25% federal tax withholding. For smaller prizes, the rate is either 24% or 27%. Exceptions exist for winnings from Puerto Rico lotteries.
Powerball, MegaMillions, and other multi-state lottery games are required to withhold federal taxes before prizes are awarded.
Declaring Winnings on Tax Returns
Even if taxes are withheld, lottery winners must declare prizes as income on their federal and state tax returns. Any additional taxes owed must be paid. Or winners can receive refunds if too much tax was withheld.
Foreign lottery winners may also need to file U.S. tax returns or claims for refunds, depending on the amount won.
Taxpayer Responsibilities
Lottery winners are responsible for understanding all tax obligations associated with prizes. This includes properly declaring income and paying any additional taxes due. Failure to do so can result in penalties or interest charges.
Winners should work closely with tax professionals to ensure full compliance and maximize after-tax income.
Estimated Federal Tax Rate on Lottery Winnings
Lottery winnings are taxed at the highest federal income tax bracket applicable to the winner. This can mean significantly higher taxes than normal wages or investment income.
For 2023, federal tax rates on ordinary lottery winnings are:
- 10% on taxable income up to $10,275 for individuals
- 12% on income from $10,276 to $41,775
- 22% on income from $41,776 to $89,075
- 24% on income from $89,076 to $170,050
- 32% on income from $170,051 to $215,950
- 35% on income from $215,951 to $539,900
- 37% on income over $539,900
The top 37% bracket applies to the majority of large Powerball and MegaMillions jackpots. Some states may tax at close to 10%, for a combined top rate near 50%.
Reporting Lottery Winnings on Federal Tax Returns
Lottery winnings must be reported on Form 1040. The exact line depends on the type of game:
- Line 21 for winnings from state lotteries, scratch tickets, raffles, and other gambling winnings.
- Line 21 for winnings from private lotteries, such as workplace pools.
- Line 8z for winnings from bingo, keno, slot machines, and other legal gambling winnings.
Any state or federal taxes withheld should also be reported. Gambling losses may be deducted on Schedule A in some cases.
Getting Tax Help for Lottery Winnings
Given the complex tax implications, it is advisable for big lottery winners to work with tax professionals. A few options include:
- CPA or Enrolled Agent – Can advise on required filings and ensure full tax compliance.
- Tax Attorney – Helpful for more complex situations or negotiating with tax authorities.
- Wealth Manager – Can look at the bigger picture for how lottery winnings impact overall finances and taxes.
The right tax help guides lottery winners through all aspects of reporting and paying taxes on prizes. This expertise is well worth the investment.
Other Tax Considerations for Lottery Winnings
Beyond standard income tax, lottery winners should be aware of a few other potential tax obligations:
Self-Employment Taxes
If a winner had losses related to gambling or lottery activities, the IRS may consider this a hobby or self-employment. In that case, self-employment tax of 15.3% may apply to a portion of lottery winnings.
Gift and Estate Taxes
If a winner transfers large amounts of lottery wealth to heirs as gifts while alive or bequests after death, federal gift or estate taxes may apply after certain exemptions.
State Taxes
Even in states with no income tax, certain taxes may still apply to in-state lottery prizes. Non-residents may be taxed differently than residents.
Strategies to Reduce Taxes on Lottery Winnings
A few potential strategies to reduce taxes on lottery winnings include:
- Claiming prize as an annuity, not lump sum – Spreading payments over many years minimizes tax brackets in any one year.
- Paying tax preparer from winnings – Deductible expense reduces overall taxable income.
- Donating to charity – Deductible up to 60% of AGI, but consult professionals.
- Investing in tax-advantaged accounts – Municipal bonds, 401Ks, IRAs can provide tax-free growth.
- Talking to financial planners – They may identify other deductions or strategies to reduce total taxes.
Note these options should be reviewed carefully before implementation to ensure they comply with all IRS rules and regulations.
Frequently Asked Questions
What states do not tax lottery winnings?
10 states do not tax lottery winnings: Alaska, California, Delaware, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Can you avoid taxes on lottery winnings?
There is no way to completely avoid taxes on lottery winnings. But some states don’t tax winnings, and a tax professional may help reduce your overall tax burden.
Are lottery winnings taxed at ordinary income or capital gains rates?
Lottery winnings are taxed as ordinary income, not capital gains. This means they are subject to federal tax rates up to 37%, not the lower long-term capital gains rate.
Do you have to pay taxes on lottery winnings annually?
For annuity prizes paid over many years, taxes are withheld annually from each payment. For lump sums, taxes are generally withheld immediately upon payout.
Can Powerball winnings be claimed anonymously?
Powerball winners cannot remain anonymous. Lottery agencies are required to publicly release the name and home state of each winner for transparency.
Conclusion
While lottery winnings can change lives with sudden riches, winners must still plan for the tax obligations that come with the prize money. Understanding how different states treat lottery winnings for tax purposes can mean the difference between taking home a jackpot or losing nearly half to taxes.
With proper tax planning and guidance from professionals, lottery winners can minimize their overall tax liability and keep more of their windfall. While the thrill is winning the lottery, the winner’s long-term happiness often depends on what they get to actually keep after all is said and done.
