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Powerball prizes are subject to tax so it is not just a case of looking at the advertised amounts to see how much money you would receive if you won. The rate of withholding depends on how much you win and the jurisdiction in which you buy your ticket. A federal tax is levied on all winners of prizes greater than $5,000, while many of the participating states apply their own tax on top of this. In addition, some locations, such as New York City, levy a local tax on lottery winnings.
You can find out how much tax you might have to pay below. As it is such a complex issue, you should consult a financial expert in the event of a big lottery win so that you're fully aware of your tax obligations.
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Federal Taxes on Lottery Winnings
Lottery winnings are treated as income in the United States, so your final tax bill depends on how much money you make in total in a year, not just the amount you win in the lottery. The following table shows the federal tax obligations for a Powerball winner filing as a single taxpayer. The rates you pay may differ depending on your individual circ*mstances.
| Prize | Federal Tax Obligations |
|---|---|
| $0-$600 | No deductions |
| $600.01 - $5,000 | Winnings must be reported on federal income tax form |
| $5,000.01 and above | 24-37%, depending on prize amount |
Federal tax rules are consistent across the U.S. You do not have to pay tax on any prize up to $600, but you must report your winnings to the Internal Revenue Service (IRS) if you win an amount between $600.01 and $5,000. You will be issued a W-2G form to complete with your tax returns.
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A federal tax of 24 percent will be taken from all prizes above $5,000 (including the jackpot) before you receive your prize money. You may then be eligible for a refund or have to pay more tax when you file your returns, depending on your total income. If you win the jackpot you will be subject to the top federal tax rate of 37 percent. Players who are not U.S. citizens are subject to an initial federal tax payment of 30 percent rather than 24 percent.
Deductions for Gambling Losses
Playing the lottery is classed as gambling as far as the Internal Revenue Service (IRS) is concerned, which means that you are entitled to a tax deduction on any losses incurred. To file these deductions, you will need to keep an accurate record of your wins and losses, as well as any evidence of them, such as the tickets you bought. You must itemize the deductions on the tax form 1040, obtainable from the IRS website. The losses you deduct cannot exceed your income from all forms of gambling, including but not limited to horse racing, casinos, and raffles.
If you win the jackpot and take the annuity payout, the annual payments will be recorded individually in each tax year, and will count towards your gambling income for that year. This should be taken into consideration when recording wins and losses for tax deduction purposes.
State Taxes
In addition to federal taxes, your Powerball winnings may also be subject to state taxes. It is important to remember that the tax levied on your prize will not only vary by state but also depending on your individual circ*mstances.
The following table shows the rate of withholding for each participating jurisdiction, along with the threshold for when prizes start to be taxed at a state level.
| State Withholding | Jurisdiction | Threshold for State Tax |
|---|---|---|
| No state tax on lottery prizes | California, Florida, New Hampshire, Puerto Rico, South Dakota, Tennessee, Texas, U.S Virgin Islands, Washington State, Wyoming | N/A |
| 2.9% | North Dakota | $5,000 |
| 3.07% | Pennsylvania | $5,000 |
| 3.23% | Indiana | $1,200 |
| 4% | Colorado, Ohio, Oklahoma, Virginia | $5,000 |
| 4% | Missouri | $600 |
| 4.25% | Louisiana, Michigan | $5,000 |
| 4.8% | Arizona | Undisclosed |
| 4.9% | Arkansas | Undisclosed |
| 4.95% | Illinois | $1,000 |
| 3-5% | Mississippi | 3% for prizes from $600 to $5,000, 4% for prizes between $5,001 and $10,000, and 5% for prizes above $10,001 |
| 5% | Iowa, Kansas, Massachusetts, Nebraska | $5,000 |
| 5% | Kentucky | Undisclosed |
| 5-8% | New Jersey | 5% for prizes above $10,000 and up to $500,000. 8% for prizes above $500,000 |
| 5.25% | North Carolina | Undisclosed |
| 5.75% | Georgia | $5,000 |
| 5.99% | Rhode Island | $5,000 |
| 6% | New Mexico, Vermont | $5,000 |
| 6.5% | Idaho, West Virginia | $5,000 |
| 6.5% | South Carolina | $500 |
| 6.6% | Delaware | $5,000 |
| 6.9% | Montana | $5,000 |
| 6.99% | Connecticut | $5,000 (or winnings of $600 or more that are at least 300 times the amount of the wager placed) |
| 7.15% | Maine | $5,000 |
| 7.25% | Minnesota | Undisclosed |
| 7.65% | Wisconsin | $2,000 |
| 8% | Oregon | $1,500 |
| 8.5% | Washington D.C | $5,000 |
| 8.95% | Maryland | $5,001 |
| 10.9% | New York | $5,000 |
Tax Calculator
Use the tax calculator below to calculate how much of your payout you would be taking home following the respective federal and state taxes that are deducted. Just enter the amount you have won and select your state. Then select if this was the jackpot or not, and if it was then choose whether you took the annuity option or cash lump sum. The lottery calculator will then show your final payout value after taxes.
Local Taxes
In addition to federal and state taxes, many cities, counties and municipalities in the United States levy a local income tax. This can vary greatly depending on the location, but in all cases it will be applied on top of any other income taxes. New York City, for example, applies a local tax of 3.876 percent in addition to the top state income tax rate of 10.9 percent and the top federal rate of 24 percent.
This means that a New York resident who opts for the cash lump sum payout of Powerball’s starting jackpot will end up with a final payout of roughly $8.4 million, just 42 percent of the advertised $20 million prize. Being aware of these rules before you make a prize claim can protect you from the shock of seeing millions of dollars slashed from your prize money.
Taxes for Lottery Pools
If you win a large prize as part of a lottery pool, you are still required to pay taxes on your winnings. Each member of the group will be liable to pay their share of taxes, so everyone will need to report the income when filing their returns. Some states make this easy, as they allow each member of a lottery pool to claim individually through a shared or multiple ownership claim. In these cases the prize money will be paid directly to each member of the pool and the appropriate taxes will be withheld at the point of payment.
It gets slightly more complicated when the entirety of the prize money is paid to one representative, who is then responsible for distributing the winnings to other people. In these cases, anyone receiving a share of the money who is not named as the actual winner will need to complete IRS form 5754 to report the income. This will need to be filled out by every member of the group except the named claimant before the prize money is distributed. Form 5754 must be filed by December 31st of the tax year in which the prize was paid.
In the event of a big prize win, you should contact your state lottery for further guidance about your tax obligations and what you need to do to report the income correctly.
