November 01, 2017
Your gambling winnings are generally subject to a flat 24% tax. However, for the following sources listed below, gambling winnings over $5,000 are subject to income tax withholding: Any sweepstakes, wagering pool (including payments made to winners of poker tournaments), or lottery.
Have you recently won some cash at the casino or racetrack? Congratulations! While it is very exciting, keep in mind there are tax implications and you should be prepared to pay federal, state and local income taxes on the winnings.
You can anticipate that the casino or other party that provides the payout to give or send you a Form W-2G. The information reported on this federal form includes the date you won, the reportable winnings, type of wager, federal and state taxes withheld and other details about the transaction.
You will file a W-2G if you won money from any of the following sources (please note, the list is not exhaustive):
- Horse/dog track or off track betting
- Jai-alai
- State-conducted lottery
- Keno • Bingo
- Slot machines
- Poker winnings
- Any other type of gambling winnings
Keep in mind, even if you win money at a charity event that is hosted by a church or other type of non-profit organization, those winnings are taxable. If you paid money to participate in the event, such as purchased cards for a game of bingo at your church, you cannot claim the funds you spent as a donation to a non-profit organization when you file your income taxes.
If you find yourself on the losing end of a game of chance, you may wonder if you can report a gambling loss on your tax return. Generally, it is not allowable, but there are exceptions. It is advisable that you consult with a tax professional if you find yourself in such a situation or have questions.
For rules, laws and other information pertaining to gaming in Indiana, visit the Indiana Gaming Commission website at http://www.in.gov/igc/.
You’ve beaten the odds and won the lottery. Depending on where you won your prize, the deal is even sweeter, since some states don’t tax lottery winnings. It doesn’t matter if you don’t live in the state in which you won. You will still have to pay their taxes, as well as federal taxes on your prize. Here’s a basic lottery tax calculator so you can figure out what you owe on the state level if anything.
State Tax On Lottery Winnings
Gambling Winnings Out Of State
Taxes are based on where the winning lottery ticket was purchased, not where the winner resides. If you won the lottery in a state that doesn’t have an income tax, you’ve really hit the jackpot. Florida, Hawaii, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming are the states without income tax. California and Delaware are other especially lucky states for lottery winners since they don’t impose state taxes on such windfalls. Although they aren’t states, winners also aren’t charged taxes in Puerto Rico or the U.S. Virgin Islands. Here is the tax on lottery winnings by state:
- Arkansas – 7 percent
- Colorado – 4 percent
- Connecticut – 6.99 percent
- Georgia – 6 percent
- Idaho – 7.4 percent
- Illinois – 4.95 percent
- Indiana – 3.40 percent
- Iowa – 5 percent
- Kansas – 5 percent
- Kentucky – 6 percent
- Louisiana – 5 percent
- Maine – 5 percent
- Massachusetts – 5 percent
- Michigan – 7.25 percent
- Missouri – 4 percent
- Montana- 6.9 percent
- Nebraska – 5 percent
- New Jersey – 8 percent
- New Mexico – 6 percent
- New York – 8.82 percent
- North Carolina – 5.499 percent
- North Dakota – 2.9 percent
- Oklahoma – 4 percent
- Ohio – 4 percent
- Oregon – 8 percent
- Pennsylvania – 3.07 percent
- Rhode Island – 5.99 percent
- South Carolina – 7 percent
- Vermont – 6 percent
- Virginia – 4 percent
- West Virginia – 6.5 percent
- Wisconsin – 7.65 percent
While Arizona and Maryland tax their resident lottery winners at 5 percent and 8.75 percent, respectively, out-of-state residents winning these state lotteries will have a greater percentage of tax withheld. Five states don’t have lotteries: Alabama, Alaska, Mississippi, Utah and Nevada, wherein lies Las Vegas, the gambling capital of the nation.
Federal Lottery Taxes
The Internal Revenue Service considers lottery winnings as gambling income. Such monies are in the same class as those won in casinos, horse racing and raffles. If you won a big ticket item, such as an automobile, you would have to pay taxes on its fair market value. Report your winnings on Form 1040, line 21, as “other income.” You’ll receive Form W-2G, “certain gambling winnings,” from the payor with the information you’ll need.
You’ll pay taxes at ordinary income rates at the federal level, but if you’ve won more than $5,000, the amount of tax owed is automatically withheld by the lottery authority. If you received a large but not stupendous amount of money, automatic withholding is 24 percent. If it’s a Powerball payout, however, that’s a different story.
Powerball After Taxes
If you won the Powerball lottery, expect to pay 37 percent in federal tax on your winnings, along with any state taxes. That’s the new top tax rate under the Tax Cut and Jobs Act, signed into law by President Donald J. Trump on December 22, 2017. If you won Powerball or other major lotteries before then, you’d pay 39. 6 percent, and that 2.6 percent difference means you keep tens of thousands or even hundreds of thousands of dollars more in your pocket.
If you are a big winner, it’s critical that you receive professional tax advice. This is not a time to try and do this on your own, and remember, you can now afford to hire the best to keep your tax bite as low as possible. That may include making large donations to your favorite charities and receiving a tax break.
Powerball Lump Sum Versus Annuity
Powerball winners can receive their money in two ways, either as a lump sum or through an annual annuity. If you opt for the first method, you won’t get the entire amount if you are the sole winner. With the annual annuity, you’ll eventually receive the entire amount, but it is remitted to you over a period of 30 years of annual payments. Most winners choose the lump sum option, even though they are potentially giving away millions of dollars. Perhaps that makes sense for an older winner who doesn’t expect to live another 30 years, but younger winners should discuss the situation with a tax professional. For example, a Powerball Jackpot Analysis for November 2018, shows a winner could receive $107 million in an annuity, but just $61 million if they decide to take the funds in a lump sum. The winner would receive $3.56 million annually for 30 years under the annuity distribution, paying federal tax of $856,000 plus any applicable state taxes. The bottom line, sans state taxes, is $2.7 million annually. The person going for the lump sum distribution of $61 million pays just over $14 million in federal taxes, for a total of about $46 million not counting state taxes. That’s a nice chunk of change, but over 30 years, the winner who took the annuity will receive a total in the range of $81 million, nearly double the lump sum amount.
Gambling Winnings Reporting
Taking the Annuity
When the monetary difference is so great, why do most Powerball winners decide to take the lump sum rather than the annuity? Odds are these are folks who didn’t consult a tax attorney or other financial professional beforehand. They may think an annuity ends when they die, but that’s not the case with Powerball or other major lottery wins. If the winner dies before receiving all of the payments, the remaining payments become part of their estate. There is a downside, however. The IRS will collect estate tax based on the annuity’s future value if the winner dies not long after hitting the jackpot. Powerball has a provision that can convert the annuity into a lump sum if the estate can’t pay the tax owed, but such conversions aren’t permitted in every state. Find out whether this is allowed in the state in which you bought your ticket.
Perhaps you want to enter the world of the mega-rich very quickly, and an income of a few million a year doesn’t quite make it. If that’s the case, perhaps the lump sum is a better alternative, but it’s important that you “protect yourself from yourself,” as the New York Times puts it. There are plenty of lottery winners who end up broke because they made huge purchases with these winnings, and gave money to the long-lost friends and relatives who seem to appear out of the blue when they hear you’ve struck it rich. With an annuity, if you make a bad choice one year, there’s always a big check waiting for you the following year.
Other State and Federal Deductions
Reporting Gambling Winnings From Another State
If you’re a big winner, but owe back taxes, child support or have student loans outstanding, expect to have those payments deducted from your winnings. If you bought your ticket in a city or county that imposes its own taxes on lottery winnings, you would have those monies deducted as well. On the national level, if you’re not a U.S. resident, you’ll pay a flat 30 percent in federal withholding on your prize money.
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About the Author
How To Report Gambling Winnings From Another State
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.