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 his or her 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.
What is the tax rate for lottery winnings? For federal taxes, lottery winnings are taxed according to the federal tax brackets. Federal tax brackets are progressive, so portions of the winnings are taxed at different rates, and could be as high as 37%. State income taxes vary by location. Some states do not have a state income tax, while others may withhold up to 8.82%.
The states that do not levy an individual income tax are:
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 multistate lotteries, only Arizona and Maryland tax the winnings of people who live out of state.