Lottery Tax Calculator

Worked example

A $100 million jackpot taken as cash is $48 million before tax. The lottery withholds 24% — $11.5 million — but the tax owed is 37% of almost all of it, so about $6.2 million more is due at filing. In a no-tax state you keep $30.3 million: 30% of the advertised number.

How to work it out yourself

1. 1.Start from the advertised jackpot. It is the annuity total across 30 years, not a sum anyone has. The cash value — what you get if you take it now — is a published figure and has recently run between 45% and 60% of it.
2. 2.Expect the 24% withheld at source to be short. Any jackpot puts you in the 37% band, so the difference is due with the return the following April, and it is the single most common surprise on a large prize.
3. 3.Add your state. Nine states have no income tax; California and Delaware tax income but exempt lottery prizes; New York City residents pay a city tax on top of the state one.
4. 4.The tax figure treats the prize as your only income for the year. On a jackpot that is close enough to true; on a $5,000 prize stacked on a salary it understates the bill, because the prize is taxed at the rate your wages already reached.
5. 5.Compare the two payouts on the total, not the headline. Thirty annual payments are taxed at a lower average rate than one lump, but the lump can be invested — which of those wins depends on a return you have to assume.

The formula

1. Cash value of the jackpot100000000 * 48 / 100
2. Amount taxed this year1 * 48000000 + 0 * (100000000 / 30)
3. Federal tax withheld up front at 24%48000000 * 0.24
4. Taxable income after the standard deductionmax(0, 48000000 - 16100)
5. Federal tax actually owed
6. State tax48000000 * 0 / 100
7. Still owed at filing, over the 24% withheldmax(0, 1771 - 11520000)
8. What you keep48000000 - 1771 - 0
9. Share of the advertised jackpot you keep3029 / 100000000 * 100
10. If annuity, the same each year for 30 years0 * 3029

Source: IRS Publication 505 — withholding on gambling winnings is 24%, which is not the tax owed, IRS — federal income tax rates and brackets

Questions people actually ask

How much tax do you pay on lottery winnings?

The lottery withholds 24% federally before you see it, and the tax actually owed is 37% on everything above the top bracket threshold, which any jackpot clears. The gap between those two numbers is paid at filing. State tax runs from nothing to over 10% on top, and the winner is responsible for it even when nothing was withheld.

Why is the lump sum so much less than the jackpot?

Because the advertised jackpot is what thirty annual payments add up to, and the cash value is what it costs the lottery to buy that stream today. The gap is interest: when rates are high the cash share is higher, when they are low it falls. It is not a penalty for taking cash — it is the same money valued at two different dates.

Is the annuity better than the lump sum?

The annuity pays more in total and is taxed at a lower average rate, because each payment is a smaller slice through the brackets. The lump sum is worth more if it earns more than the rate the lottery used, and it is yours if the estate matters. The honest answer is that it turns on an investment return nobody knows, which is why this calculator gives both figures rather than a verdict.

Which states do not tax lottery winnings?

The nine with no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — plus California and Delaware, which tax income but exempt state lottery prizes. Everywhere else it is ordinary income. Buy a ticket across a state line and both states may want a share.

Related

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