Of the 43 states that participate in multistate lotteries, only Arizona and Maryland tax the winnings of nonresidents. In Arizona, residents pay 5 percent and nonresidents pay 6 percent. In Maryland, residents pay 8.75 percent and nonresidents pay 7 percent. These percentages are what the states withhold from your lottery checks -- not the tax bill you actually pay. The taxes are due on April 15 the year after you win.
Withholding Versus Payment
At both the federal and state level, you'll deal with taxes once during the year you win and then later, when you file your tax returns. The year you win, your lottery check will be subject to withholding, just as money is withheld from a paycheck. This way, the government knows you'll have the money to pay taxes in April. If the winnings top $5,000, the Internal Revenue Service withholds 25 percent. Most states also withhold money, but nine do not: California, Delaware, Florida, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, and Washington. Of those, six don't have an income tax.
Non-Resident Lottery Taxes
If you bought your ticket in Arizona but live in another state, Arizona withholds part of your lottery check. If you bought your ticket in another state but live in Arizona, Arizona also withholds part of your check. Maryland works exactly the same way. Your lottery check will be either an annuity payment, which is a partial payment doled out every year; or a lump sum adjusted downward to reflect inflation's effect over the same length of time as the annuity. Your taxes are based on the money you receive during the tax year.
States that Charge Residents Only
In three states -- California, Delaware, and Pennsylvania -- you pay income taxes on your winnings when you file an income tax return, but those three states don't withhold money beforehand. You'll have winnings withheld in all the rest of the states that tax personal income and also participate in the multi-state lottery. As of 2014, the lowest rate is Indiana's, at 3.4 percent. The highest is New York's, at 8.82 percent. If you live in New York City, you pay the highest lottery tax in the nation -- 12.612 percent. That's in addition to the federal income tax.
The Tax is Due on April 15
The amount you owe on April 15, when your state and federal income tax returns are due, depends on how much you won, how much you gave away, and sometimes whether you took the winnings in a one-time lump sum or as an annuity. If a yearly payment puts you in a lower tax bracket than a one-time lump sum, an annuity may save you some taxes. Then again, it may not, depending on a host of factors. Taxes get really complicated, so if you win a lot of money, you should hire an accountant or tax specialist to help with your return.
- BananaStock/BananaStock/Getty Images
- "If Owing Back Taxes or Child Support, Will the Government Take Lottery Winnings to Pay for It?"
- How Much State Tax Is There on Bonus Checks?
- What Are the Standard Payroll Deductions?
- How Many States Have Progressive Income Taxes?
- What Is State Withholding Tax?
- How to Read a W2 Form
- Your Money and Taxes
- Figuring Out Payroll Taxes for Someone's Salary