You’ve hit big and earned a life-changing fortune landing one of your lottery tickets? The dream situation will suddenly return you to reality as Uncle Sam will knock on your doors claiming his fair share of your winnings. The blunt answer to the question asked in the title is yes. All revenue a bettor generated through gambling is subject to both federal and state taxes. Lottery winnings are considered as gambling money and as such are taxed as ordinary income by the Internal Revenue Service.
Federal and State Tax Rates
Your gambling jurisdiction plays a significant role in this matter as all states have different tax rates. To avoid confusion. The state taxes are charged on top of a fixed 24% federal tax on all gambling winnings. Speaking of lottery agencies in particular, all Lottery Winnings in the US of at least $5,000 are subject to the 24% federal tax.
On top of the federal tax. You are required to pay extra fees to your specific state upon hitting a big score with your lottery ticket. New York residents are in the worst position as they have to pay an extra 8.82% to the state and additional 3.876% to the city. To sum it all up. If you are an owner of a winning lottery ticket in New York. You will have to give up almost 40% of the profit through taxes.
The situation is much better in most other states. Alaska, South Dakota, Nevada, Texas, Wyoming, Washington and Florida do not charge any state taxes. While some states such as New Hampshire, California and Tennessee separate their local lottery from the gambling industry and exclude it from. The taxable revenue. The best way to be 100% safe would be to consult gambling tax experts and check the fixed rates in your particular states.
What’s the situation like for casino, poker and sports betting?
In terms of the gambling tax rates, there is no difference between the lottery and any other gambling discipline. As long as you’ve won $600 or more, whether it was on the horse track, keno, slot machine, or via the best poker app, you are obliged to report the Lottery Winnings in the US to the state. After all, this is why all casinos will ask for your Social Security Number before they pay your big wins.
To stay on the safe side, make sure to fill in an IRS Form W2-G whenever you win $600 or more on any kind of gambling activity.
Receiving the winnings in a lump sum or as annual installments
Okay, back to the lottery. The second important factor has to do with the way in which you collect your winnings. You have the option to claim a one-time payment deducted by the taxes or to receive smaller amounts on a yearly basis that would be taxed over time. The decision you make in this matter can significantly affect your tax rate.
If you decide to accept the winning in a single installment. There is a very high chance you will be bumped into a higher bracket for the tax year. The best way to understand the distinction would be through a simple example. Let’s say you are sitting at $50,000 in terms of your taxable revenue. You’ve suddenly become a millionaire by winning $1 million on Mega Millions and you’ve decided to receive the full prize right away. Your taxable sum would instantly grow from $50,000 to $1,050,000 for that specific year. Since all US residents whose revenue exceeds $510,300 in a year are taxed at 37%. You will move to the top tier and pay higher rates as a consequence.
You can avoid the switch between tax brackets by agreeing to collect your prize in annual payments. The maximum federal tax rate on your revenue would be 22% if you receive 30 payments of around $33,333 every year.
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