Winning a lottery outside one’s home state is not uncommon. According to the Census Bureau, more than one-fourth of American workers move to another state for a job and these people could have bought a lottery ticket in the other state. Some people may have also purchased a ticket when on vacation in another state.
If you win a lottery in a neighboring state, a portion of your winnings get automatically withheld as state (the state you bought the ticket in) and federal taxes. If you bought the ticket in a no-tax-on-lottery state, such as California and Delaware, the IRS would deal with those earnings later.
Rules for lottery vary across states and they come into play when you strike a jackpot. Keep reading to learn how the state you reside in and the state you won the lottery in, the lottery prize money, and other factors ascertain how much money you actually get to keep.
Paying Taxes on Your Lottery Winnings
Generally, you pay taxes on lottery money in the state you bought the lottery ticket in. However, the state you are based in would also tax the prize money. The lottery company would deduct tax money before the prize money even reaches your bank account. In other words, you would have paid both state and federal taxes beforehand.
This “tax deduction in advance” usually applies to larger lottery wins. In case of smaller wins, the taxes due won’t be deducted at source or in advance. On your tax returns, you must enter the lottery prize money as ”other income.”
Does buying a ticket in a state other than your home state lead to dual state taxes?
No, usually not. As you’ve already paid state tax to another state, your home state will take that into account. This means you’ll have to pay just the difference or the tax money you thought you saved by buying a lottery ticket in a neighboring state.
If you don’t want to pay taxes to different states, you may set up residence in the state you won the lottery, claim the prize, pay taxes on your winnings, and head back to your home state. However, since states are constantly on the lookout for tax revenue sources, this home shifting strategy may not work.
The provision to buy lottery tickets in different states isn’t there to help you game the IRS or benefit from tax savings, but to enable you to purchase lottery tickets when you’re outside your state for work, on vacation, traveling, etc.
The Rate of Tax on Lottery Money in the U.S.
If you’ve won a massive jackpot, such as the top Powerball prize, your tax rate could be more than 40 percent, which includes both state and federal taxes.
Federal Tax Rate
The American government automatically deducts 24% (formerly 25%) of the lottery prize money at source as federal taxes. This is before the money could be disbursed to the winner. If a citizen has no Social Security number (SSN) or doesn’t provide one, the tax cut would be 24% (formerly 28%). For foreigners winning large lottery sums in the U.S., the tax deduction is 30%.
State Tax Rates
Based on the state you live in and the state you purchased the ticket in and also your lottery prize money, you could be taxed up to 15% in addition to the aforementioned federal tax. Different states could tax lottery money at different rates. You could owe some of the money at the time of tax-filing.
Some states do not tax lottery winnings, which include Delaware and California. There are also states that levy the minimum possible tax rate on lottery wins, which include Tennessee (1%), North Dakota (2.9%), Pennsylvania (3.07%), Indiana (3.23%), Michigan (4.25%), and Arizona (4.50%), among a few others.
Your final tax bill would vary depending on a few other elements pertaining to your tax situation, which includes the possibility of deductions such as charitable donations.
Jimmy Donaldson, aka MrBeast, explains lottery winnings and taxes in the simplest possible manner in this video.
If you want to know how much you’ll be allowed to keep if you hit the jackpot in your state, head over to this awesome lottery tax calculator.
Seek Professional Advice on Lottery Winnings and Taxes
If you’ve won several million dollars in the lottery or even if your winnings are less than a million dollars, it’s advised you seek professional tax advice. Ascertaining how much money you owe as taxes on your lottery winnings is something you shouldn’t be thinking of doing by yourself.
A professional would recommend strategies to help you keep your tax payments low. That could entail making big donations to charities (as mentioned before) and benefiting from a tax break. A tax professional can also help you choose between a lump sum payment and annuities.
If you go with a lump sum, you will not receive the entire sum since Uncle Sam would take a significant cut of it as taxes. In the case of annuities, the money will be paid to you as annual payments for the next 30 years. The installments will be remitted as one instant payment followed by annual payments over the next 29 years. Taxes would still be applicable, but the tax money will be lesser than lump sum payment taxes.
Most lottery winners opt for lump sum payments, despite the large tax cut on such payments. A lump sum payment sounds ideal for older winners who do not expect to live for another three decades. If you are in your 20s, 30s, or even your 40s, you must discuss your situation with a tax expert before zeroing in on a particular payment method.
Check out our annuity payout calculator to learn how the annuity payouts compare to the lump sum value.
Why Is a Lump Sum Lottery Payment So Popular Despite the Odds Against It?
The monetary difference between a lump sum and an annuity is quite significant, with more savings in taxes with an annuity. Despite that, many lottery winners don’t take the annuity route.
The major reason behind this is that people who favor lump sum payments usually do not get in touch with a financial professional, such as a tax attorney, beforehand. Also, they are under the assumption that the annuities end at their death, which is not true.
A lottery winner can nominate a beneficiary to receive the remainder of the annuity payments if they expire before receiving all of their payments. Most states allow only a single beneficiary. If you have multiple heirs, contact the lottery commission in your state to discuss your options. If you don’t want the payments to go to one person when there is more than one heir, you could opt for direct payments to your estate.
Can You Buy a U.S. Lottery Ticket From Outside the U.S.?
Foreigners can buy a U.S. lottery ticket and also stand a chance to win a lottery. But these non-US residents should be in America to legally buy the tickets.
There are several lottery scams that trick non-US people into buying an American lottery ticket online. There are even scam websites that take your money promising to purchase lottery tickets on your behalf. If you come across such sites, exercise caution and do your due diligence before handing over your money.
Most sites that advertise online lotteries use a loophole - they do not actually allow you to play the lottery, but make you bet on lottery results instead, which is legal, but not exactly the same.
However, there are some legit ways to play from outside the U.S. Foreigners can use a trusted lottery concierge service like the lotter.
When you win huge lottery money – be it in your state or some other state – you would most likely not walk away with the kind of money you imagined you would. Taxes, the manner in which you claim the prize (lump sum payment or annuity), etc. would determine how much you actually end up with.
And if you’re considering buying a lottery ticket in a state that doesn’t include tax or levies a lesser tax rate on lottery winnings, then don’t do it because it may not be worth it after all.
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- Lottery Annuity vs. Lump Sum: Which Is Better?
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- Here’s What Happens When You Win the Lottery