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1 Lyman Stone & Joseph Henchman, Lottery Tax Rates Vary Greatly by State 1 (2013)

handle is hein.taxfoundation/taxfaafa0001 and id is 1 raw text is: TA X _;f~r FOUNDATION December 17, 2013 No. 407 Lottery Tax Rates Vary Greatly By State By Lyman Stone erfoseph Henchman Introduction With the Mega Millions jackpot reaching a record $586 million, Americans in 43 states and the District of Columbia are lining up to buy tickets for Friday's drawing. Everyone knows that winners must choose between a lump sum payment and installment payments, but where you purchase your winning ticket also matters, due to state income and withholding taxes. As with wage income, some amount of lottery winnings is withheld for the government before you calculate your total tax bill when filing your income tax the following year. While lottery winnings of $600 or less are not reported to the IRS, winnings in excess of $5,000 are subject to a 25 percent federal withholding tax. In other words, if one person wins the jackpot and chooses the $316 million lump sum cash option, $79 million will go straight to the IRS. Next April, the jackpot winner or winners can see if any of that amount gets refunded or if they owe even more. The same is true at the state level. While lottery winnings are subject to state income tax in most states, withholding tax varies from zero (California, Delaware, Pennsylvania, and the states with no state income tax) to over 12 percent in New York City. (See Table 1, below.) Arizona and Maryland have withholding rates for non-residents, so an out-of-state winner who bought a ticket in those two states could face double withholding.