There’s no doubt that winning the lottery is exciting and can significantly help the winner financially; however, the winner must not be too quick to spend all of their winnings. Like other income in the United States, the IRS taxes lottery winnings.
Lottery winnings are considered ordinary taxable income for both federal and state tax purposes. Winnings are taxed the same as wages or salaries are, and the total amount the winner receives must be reported on their tax return each year. Before the winner receives any of the money, however, the IRS automatically takes 24% of the winnings. The rest of the winnings are expected to be paid by the winner when filing the return.
Five states, Alabama, Alaska, Hawaii, Nevada, and Utah, do not take part in the national lottery.
States With No Taxes or Low Taxes on Lottery Winnings
California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have lottery winnings withheld. This means that only federal tax rates would apply to winnings in these states.
Of states that do withhold tax winnings, North Dakota is the lowest at 2.9%. Pennsylvania (3.07%), Indiana (3.15%), and Ohio (3.99%) also have low rates of withholding on lottery winnings.
States With High Taxes on Lottery Winnings
New York is the state with the highest percentage of tax winning withholding, with 10.9% withheld by the state. Other states and territories with high withholding percentages include New Jersey (10.75%), the District of Columbia (10.75%), Oregon (9.9%), Minnesota (9.85%), and Maryland (8.95%).
One important note is that if the winner buys a winning ticket in a state that they do not live in, most states will not withhold the winnings. Out of the 43 states that participate in multi-state lotteries, only Arizona and Maryland tax the winnings of people who live out of state.