Whether you are reading this before or after a big win, understanding what the US tax on lottery winnings is well worth your while. Since there is a huge tax difference between states and even certain cities, spending a few minutes to grasp a few basics now could ultimately save you a fortune later on.
Although the UK is not one of the best places for gambling, it still packs a big punch in terms of revenues. According to news circulating around the web, the UK is planning a 21% increase for gambling tax rates, potentially severing any new additions to its gambling industry. To compensate for this the UK Government chose to increase the 15% tax rate to a whopping 21%. Despite the increase, crucially, this has no real impact on us as punters. To go back to the very simple answer as the beginning of this piece – gambling profits and stakes in the UK are still totally tax free. The amount of Connecticut income tax to be deducted and withheld by payers of gambling winnings that are subject to federal income tax withholding is the highest effective rate of Connecticut income tax for the applicable taxable year for taxable year 1991; for the taxable year 1992) Also, if a payer of gambling winnings is a nonprofit.
Lump Sum vs. Annuity Payments
First up, any jackpot winner will only get the full lottery win payout if they opt for the '30 payments over 29 years in annuities' deal. While choosing between the lump sum and annuity payments can certainly be a tough decision, if the winner chooses to take it all in one lump sum, the jackpot amount is immediately cut down. Surprisingly, 98% of lottery winners still choose to take their winnings in one lump sum payout—probably because they are too excited to realize the full weight of deductions and taxes.
If you select the 30 payments (every participating state has different annuity payment schedules), they actually increase over time to stay in line with inflation. A well-structured annuity can be designed in quite a few ways to pay out the winner over the next 30 years; 2% to 3% interest per annum added to the annuity payouts keeps up with the current pace of inflation and can be guaranteed for 30 years to a beneficiary in case of death.
Federal Taxes on Lottery Wins
Next in line is the federal tax bill. Your lottery winnings are taxed just as if they were an ordinary income bonus. This means your income will be pushed into the highest federal tax rate, which is 37%. There is no way you can work around this—the U.S. government does not give tax breaks to even the luckiest people in the country.
With this in mind, the government will immediately and automatically withhold 24% of the lottery jackpot if the winner is a U.S. resident/citizen with a social security number. The remaining 13% must be paid in full come the next tax year. This seems a bit unfair when regions such as the United Kingdom and Canada do not regard a lottery win as extra income—it remains tax free until it becomes part of the winner's estate.
What Happens if the Lottery Is Won by a Non-Resident?
U.S. residents who don't have a social security number, for one reason or another, have 28% of the big payout withheld, and foreigners have 30% held back by the government. This is to cover the possibility of the tax balance not being honoured when April comes around.
While anyone who is visiting the country can buy a ticket, taking it out of the country is technically considered illegal. Luckily, there exist 'lottery agents,' which are companies that legally buy tickets for their non-American clients. These online lottery sites are actually the easiest way to play other countries' lotteries, as they offer many benefits and take care of most of the hassles involved in buying lottery tickets, checking them for wins, and even claiming smaller prizes. For big wins, however, you'd still need to visit the US to claim them yourself.
All the Other Taxes That Must Be Paid on Your Lottery Win
Following hard on the heels of federal taxes come state and local income taxes. If you live in New York City, a quadruple whammy of city, county, state and federal taxes will come due by the next April. This can further reduce your lump sum by another 15%.
However, if you live in Wyoming, Washington, Texas, Tennessee, South Dakota, New Hampshire or Florida, then you are not taxed on personal income, and Pennsylvania and California benevolently exempt lottery win jackpots from their state income tax if the ticket was purchased in state.
The following map breaks down lottery taxes by state:
Giving Gifts to Your Loved Ones
Won a big sum and want to gift some or all of it (yeah, right!) to a friend or family member? This is not as straightforward as one might think. A formal agreement has to be made before the numbers have been announced; otherwise, the money given to family or friends is considered a gift and not an income. This means that the tax obligations will fall on the giver and not the recipient.
The IRS actually allows you to gift up to $15,000 tax-free per person every year, but bigger amounts will eat away at your $5.45 million lifetime exemption. If you exceed that amount, then the tax will be a flat 40%. At least gifting to a spouse is unlimited!
Best Way to Think About Lottery Taxes
As far as taxes on lottery winnings around the world go, the U.S. definitely has some of the highest. In addition, the IRS can withhold prize money from winners under certain conditions, such as if they owe back taxes or child support, until their debts are cleared.
However, despite all the tax issues that loom over a lottery win, the excitement of being in the running for a record-breaking Powerball or Mega Millions jackpot still makes it very worthwhile. The monies generated from ticket sales go towards educational improvements and environmental protection, among other worthy causes, which makes the lottery a true case of 'win-win'.
If you're feeling lucky (and don't mind sharing some of your winnings with the taxman), here are the best lotteries to play both within the US and far beyond its borders.
It's difficult to do anything in life without having to pay the government in the form of tax. So surely the gambling industry is no exception?
If you expect you need to declare your gambling winnings to the government, you might be in for a surprise.
The gambling tax explained
The UK gambling tax system is very advantageous to players. Not only does it work out in your favour, but it is also incredibly easy to understand.
Whenever you gamble in the UK, you are not required to pay any tax whatsoever. You don't have to pay tax on your winnings and there's also no need to pay any tax on your initial stake either.
Gambling Winnings Tax Form
This, of course, means you don't need to report your winnings to the taxman. If you win £5,000 at an online casino, you get to keep that amount in full! This is a great improvement on the policies of other countries where you don't actually get to keep all of your winnings.
Who gets taxed?
So how is this all possible? The gambling industry is worth a lot of money, so why is the government not taxing it?
Instead of taxing the players, the UK government actually taxes the operators. But this wasn't always the case. In the past, you used to pay a tax to the government either as a tax on your stake or as a tax on your winnings. What changed then?
In 2002, the UK government was concerned the British gambling industry wasn't going to be able to compete with the rise of online gambling sites in UK. This led the government to .
As we can see today, the decision was a successful one. The UK gambling industry is still alive and well to this day.
What about professional gamblers?
Professional gamblers might actually have one of the only professions that are not actually taxed in the UK. If you are lucky enough to gamble for a living, you don't need to pay the tax man a penny on your gambling winnings.
The reasoning for this is fairly simple. If the government was allowed to tax you for doing a certain activity such as gambling, under the current tax system, you would have the ability to claim money back from the government for your losses.
The UK government does not want to open the floodgates for everyone who loses money gambling to claim money back. Not only does this mean professional gamblers won't ever be taxed, but it also means the gambling tax is unlikely to return any time soon.
How did operators react?
It's no surprise that casino operators were not too thrilled about this new taxation system. Operators looked for a way to pay as little tax as possible.
Some of them starting running their businesses out of 'tax haven' countries. These countries require casino companies to only pay a very small amount of tax compared to the UK. This is a big reason you will see certain countries such as Malta coming up over and over again in the gambling industry; they offer very favourable tax rates to casino operators.
Unfortunately for the operators, the UK government took a stand against this practice. They introduced the Point of Consumption Tax (POCT).
Enjoy tax-free gambling
The tax system for players in the UK is elegantly simple. You don't pay any tax whatsoever on any kind of gambling transaction. It's the operators who have to worry about navigating the UK tax system, not the players.
What Else Might Interest You:
Online Roulette - Some basics for beginners
Lump Sum vs. Annuity Payments
First up, any jackpot winner will only get the full lottery win payout if they opt for the '30 payments over 29 years in annuities' deal. While choosing between the lump sum and annuity payments can certainly be a tough decision, if the winner chooses to take it all in one lump sum, the jackpot amount is immediately cut down. Surprisingly, 98% of lottery winners still choose to take their winnings in one lump sum payout—probably because they are too excited to realize the full weight of deductions and taxes.
If you select the 30 payments (every participating state has different annuity payment schedules), they actually increase over time to stay in line with inflation. A well-structured annuity can be designed in quite a few ways to pay out the winner over the next 30 years; 2% to 3% interest per annum added to the annuity payouts keeps up with the current pace of inflation and can be guaranteed for 30 years to a beneficiary in case of death.
Federal Taxes on Lottery Wins
Next in line is the federal tax bill. Your lottery winnings are taxed just as if they were an ordinary income bonus. This means your income will be pushed into the highest federal tax rate, which is 37%. There is no way you can work around this—the U.S. government does not give tax breaks to even the luckiest people in the country.
With this in mind, the government will immediately and automatically withhold 24% of the lottery jackpot if the winner is a U.S. resident/citizen with a social security number. The remaining 13% must be paid in full come the next tax year. This seems a bit unfair when regions such as the United Kingdom and Canada do not regard a lottery win as extra income—it remains tax free until it becomes part of the winner's estate.
What Happens if the Lottery Is Won by a Non-Resident?
U.S. residents who don't have a social security number, for one reason or another, have 28% of the big payout withheld, and foreigners have 30% held back by the government. This is to cover the possibility of the tax balance not being honoured when April comes around.
While anyone who is visiting the country can buy a ticket, taking it out of the country is technically considered illegal. Luckily, there exist 'lottery agents,' which are companies that legally buy tickets for their non-American clients. These online lottery sites are actually the easiest way to play other countries' lotteries, as they offer many benefits and take care of most of the hassles involved in buying lottery tickets, checking them for wins, and even claiming smaller prizes. For big wins, however, you'd still need to visit the US to claim them yourself.
All the Other Taxes That Must Be Paid on Your Lottery Win
Following hard on the heels of federal taxes come state and local income taxes. If you live in New York City, a quadruple whammy of city, county, state and federal taxes will come due by the next April. This can further reduce your lump sum by another 15%.
However, if you live in Wyoming, Washington, Texas, Tennessee, South Dakota, New Hampshire or Florida, then you are not taxed on personal income, and Pennsylvania and California benevolently exempt lottery win jackpots from their state income tax if the ticket was purchased in state.
The following map breaks down lottery taxes by state:
Giving Gifts to Your Loved Ones
Won a big sum and want to gift some or all of it (yeah, right!) to a friend or family member? This is not as straightforward as one might think. A formal agreement has to be made before the numbers have been announced; otherwise, the money given to family or friends is considered a gift and not an income. This means that the tax obligations will fall on the giver and not the recipient.
The IRS actually allows you to gift up to $15,000 tax-free per person every year, but bigger amounts will eat away at your $5.45 million lifetime exemption. If you exceed that amount, then the tax will be a flat 40%. At least gifting to a spouse is unlimited!
Best Way to Think About Lottery Taxes
As far as taxes on lottery winnings around the world go, the U.S. definitely has some of the highest. In addition, the IRS can withhold prize money from winners under certain conditions, such as if they owe back taxes or child support, until their debts are cleared.
However, despite all the tax issues that loom over a lottery win, the excitement of being in the running for a record-breaking Powerball or Mega Millions jackpot still makes it very worthwhile. The monies generated from ticket sales go towards educational improvements and environmental protection, among other worthy causes, which makes the lottery a true case of 'win-win'.
If you're feeling lucky (and don't mind sharing some of your winnings with the taxman), here are the best lotteries to play both within the US and far beyond its borders.
It's difficult to do anything in life without having to pay the government in the form of tax. So surely the gambling industry is no exception?
If you expect you need to declare your gambling winnings to the government, you might be in for a surprise.
The gambling tax explained
The UK gambling tax system is very advantageous to players. Not only does it work out in your favour, but it is also incredibly easy to understand.
Whenever you gamble in the UK, you are not required to pay any tax whatsoever. You don't have to pay tax on your winnings and there's also no need to pay any tax on your initial stake either.
Gambling Winnings Tax Form
This, of course, means you don't need to report your winnings to the taxman. If you win £5,000 at an online casino, you get to keep that amount in full! This is a great improvement on the policies of other countries where you don't actually get to keep all of your winnings.
Who gets taxed?
So how is this all possible? The gambling industry is worth a lot of money, so why is the government not taxing it?
Instead of taxing the players, the UK government actually taxes the operators. But this wasn't always the case. In the past, you used to pay a tax to the government either as a tax on your stake or as a tax on your winnings. What changed then?
In 2002, the UK government was concerned the British gambling industry wasn't going to be able to compete with the rise of online gambling sites in UK. This led the government to .
As we can see today, the decision was a successful one. The UK gambling industry is still alive and well to this day.
What about professional gamblers?
Professional gamblers might actually have one of the only professions that are not actually taxed in the UK. If you are lucky enough to gamble for a living, you don't need to pay the tax man a penny on your gambling winnings.
The reasoning for this is fairly simple. If the government was allowed to tax you for doing a certain activity such as gambling, under the current tax system, you would have the ability to claim money back from the government for your losses.
The UK government does not want to open the floodgates for everyone who loses money gambling to claim money back. Not only does this mean professional gamblers won't ever be taxed, but it also means the gambling tax is unlikely to return any time soon.
How did operators react?
It's no surprise that casino operators were not too thrilled about this new taxation system. Operators looked for a way to pay as little tax as possible.
Some of them starting running their businesses out of 'tax haven' countries. These countries require casino companies to only pay a very small amount of tax compared to the UK. This is a big reason you will see certain countries such as Malta coming up over and over again in the gambling industry; they offer very favourable tax rates to casino operators.
Unfortunately for the operators, the UK government took a stand against this practice. They introduced the Point of Consumption Tax (POCT).
Enjoy tax-free gambling
The tax system for players in the UK is elegantly simple. You don't pay any tax whatsoever on any kind of gambling transaction. It's the operators who have to worry about navigating the UK tax system, not the players.
What Else Might Interest You:
Online Roulette - Some basics for beginnersTurbo Tax Gambling Winnings
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Nys Tax On Gambling Winnings
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