All things are possible when you win the lottery: You can complete your bucket list, quit your job or buy that Harley. You also get to pay a bunch in taxes. Depending on what state you live in, you might give nearly half your winnings to the government. You will owe taxes on your winnings the same tax year you collect the money.
Pay When You Collect
The time you actually draw income from your lottery winnings starts the tax clock. You report your winnings on your tax return in the year you receive them. You will get a W-2G form showing how much you were paid and how much was withheld. Like with your W-2 form from work, attach the W2-G to your tax return when you file.
Most Taxes Withheld Immediately
Just like with that job you're thinking about quitting, most of your taxes get pulled out of your lottery winnings right away. In 2014, a full 25 percent comes off the top as a federal tax withholding, or 28 percent if you didn't show a Social Security number or taxpayer ID. If your state taxes income, it will also grab its share with a withholding.
While you can take your lottery winnings all at once and get nipped one time for taxes, you can also spread the proceeds over time. Large, nine-digit lottery payouts can be stretched out with a 25- to 30-year annuity. But while you're taking the money over time, the tax man gets his cut over time by withholding 25 percent from your checks. Your winnings go on the tax form the year you receive them. An annuity may be the way to go if you spend money as fast as you see it.
Federal Tax Rate
You're still not done with the taxes, though. In 2014 federal taxes took up 35 percent of your collected lottery winnings, so those on-the-spot withholdings don't cover your entire federal tax bill. While you're using your winnings to stimulate the economy, be sure to put 10 percent of your check aside to satisfy the rest of your federal income tax.
State Tax Rates
How much state tax you pay depends on where you live. Some states don't levy income tax on lottery winnings while others collect nearly 10 percent. While each state withholds a fixed percentage from your lottery check, you may owe more or receive a refund. When you win a large amount, you need to see a trustworthy tax professional and find some good financial and legal advisers.
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