The IRS wants a share of your lottery winnings.
State lotteries provide revenue for government coffers in more than one way. Apart from ticket sales, lotteries also produce new income for winners, income that's subject to federal and state taxes. The Internal Revenue Service (IRS) requires states to withhold federal taxes from some prizes. Depending on where you live or where you win, the state may also withhold state taxes. The amount of tax you'll pay overall on Lotto winnings depends on the prize, the state and your other income.
Lotto Games
Various state lotteries offer games called Lotto, including Florida, New York and Texas. Rules, prizes and odds differ. In the Florida Lotto, players choose six numbers from 1 to 53. In Lotto Texas, players also pick six numbers, but the choice is from 1 to 54. In New York, Lotto players choose numbers from 1 to 59. These three states draw winning Lotto numbers on Wednesday and Saturday nights. A ticket that matches all six winning numbers wins the jackpot, or a share of the jackpot if more than one ticket matches. Tickets that match three to five numbers win cash prizes. If no one matches six numbers, the jackpot rolls over and gets larger for the next drawing.
Federal Income Taxes
State lotteries must issue a federal W-2G form for winnings of $600 or more as of 2012. If you're a U.S. resident, but don't have a Social Security number, the state withholds 28 percent from winnings of $600 or more to pay federal income taxes. Each state must withhold 25 percent from prizes greater than $5,000 won by U.S. citizens and resident aliens with Social Security numbers. They withhold 30 percent from all prizes won by citizens of other countries who aren't U.S. residents.
State Income Taxes
State income tax rates and rules vary from state to state, so the amount you'll pay in state taxes depends on where you live and the state that issues the prize. Florida and Texas, for example, have no state personal income taxes as of 2012, so residents of those states who win a Florida or Texas Lotto prize don't pay state income tax on their winnings. New York does have a state income tax. If you win the New York State Lotto, New York will withhold New York taxes on prizes of more than $5,000, regardless of where you live. The state income tax rate is 8.82 percent. The New York City rate is 3.876 percent.
Tax Planning
State lotteries advise big winners to consult a qualified financial adviser. Tax obligations don't end with automatic withholding from prizes. The amount withheld from the prize isn't necessarily all of the federal tax owed. That depends on the amount of the prize and your other income. State tax rules vary from state to state, as do lottery rules on whether an individual, more than one individual or a trust can claim a prize. An IRS publication on gambling winnings notes that a win may require you to make estimated tax payments throughout the year.
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