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How Much Tax Do You Pay on Lottery Winnings?
If you win the lottery, the Internal Revenue Service (IRS) will take 24% before you even see a dollar of your winnings. After that, depending on your state, up to an extra 13% may be subtracted from your prize money. Then when tax time comes around, determined by how much you win, you’ll likely have to pay even more depending on which tax bracket you find yourself in after winning the lottery. With all that considered, after winning big, you may want to hire a financial advisor to aid with taxation and investment tactics. To better understand how tax on lottery winnings operates, continue reading.
How are Lottery Winnings Taxed?
The IRS regards lottery winnings as taxable income. That means you’ll have to pay federal income tax on the remainder after subtracting the lottery ticket cost. The exact amount will depend on your tax rate, which is determined by your winnings and other income sources. So after the IRS withholds 24%, the rest will be due when you submit your tax return in April. On the positive side, if you are in the highest tax bracket, you’re not required to pay 37% of your overall income. Federal income tax is progressive, meaning single filers in 2022, after deductions, will pay the following amount:
- 10% on the first $10,275 you earn
- 12% on earnings between $10,276 – $41,775
- 22% on earnings between $41,776 – $89,075
- 24% on earnings between $89,076 – $170,050
- 32% on earnings between $170,051 – $215,950
- 35% on earnings between $215,950 – $539,900
- 37% on any amount more than $539,900
But remember that these regulations only apply to federal income tax. Your city and state may also request a cut.
How are Lottery Winnings Taxed by State?
When it is time to submit taxes, some states will require you to pay a portion of your lottery winnings. The amount is determined by the state in which you live. New York has the most significant tax rate, reaching up to 13%. Nine states, however, do not have a state income tax. These are Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, and New Hampshire. If you purchase a ticket in another state, the tax rate of that state is usually withheld.
Tips to Reduce Your Tax Obligation After Winning the Lottery
Paying taxes on lottery winnings is unavoidable, but you can take specific measures to decrease the impact. For example, if the jackpot is small enough, taking the money in installments over 30 years could place you in a lower tax bracket. Donating to charities is another way to reduce your tax liability by claiming itemized deductions.
The Tax Cuts and Jobs Act also raised the lifetime gift and estate tax exclusion in 2023 to $12.92 million for single filers ($25.84 million for married couples filing jointly). If you are intending to share your wealth with family and friends, you can give up to $17,000 to each recipient without owing a gift tax. If you are married, both of you can give $17,000 to an individual, meaning you can provide a total of $68,000 to a couple, without facing a gift tax.
What to do After Winning the Lottery
Winning the lottery, especially if it is a large amount of money, can have a significant effect on a person’s life. What you do next can set you on a route to economic stability for the foreseeable future. Or it could do the opposite. Maybe one of the best things you could do with your winnings initially is nothing. Take time to assess how this windfall affects your financial state of affairs. Calculate your tax obligation with an accountant and set aside at least what it will take to pay the tax bill.
Then comes the entertaining part: developing a plan of how you will manage the rest of the money. But don’t tackle this alone if you don’t have to. Consult a qualified financial advisor who can assist you in preserving and developing the money. After all, no matter how large your winnings are, they are not limitless. Therefore, making wise financial decisions is essential if you want to have enough money to last a lifetime.
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