How Taxes Work on Lottery Winnings


Odds of winning

Odds of winning the lottery are very low. It’s less likely that you’ll win the lottery than to get hit by lightning or a shark. Nevertheless, people often believe that they can win the jackpot. Despite the minuscule odds, they continue to play.

For instance, the odds of winning the 6-digit national Powerball jackpot are 1 in 292.2 million. That’s much better than the chances of being struck by lightning, meeting a doppelganger, or giving birth to quadruplets. The good news is that there are ways to increase your odds.

Payments to winners

There are several ways to deal with payments to winners of lottery games. You can choose to receive a lump sum or an annuity, which will give you money in small amounts over time. Some lottery winners choose the former, choosing to get the money in cash immediately. But this will also mean you’ll get less money in the end.

The Powerball lottery, for example, pays out a lump sum or an annuity over a period of 29 years. Mega Millions offers 29 annual payments, each of which is 5 percent larger than the previous payment. These payments are often referred to as “lottery annuities” but are actually fixed, period-certain annuities backed by the U.S. government.

Taxes on winnings

Winning the lottery is a life-changing event, but winning money in the lottery can also result in large tax bills. Depending on where you live, you may have to pay state and federal taxes, which can reduce the amount of money you receive. To avoid this, you should understand how taxes on lottery winnings work.

First, you need to understand that lottery winnings are taxed just like ordinary income. Most states automatically withhold taxes on lottery winnings that exceed $5,000. However, these withholding rates may not correspond to your state’s individual income tax rates. For example, Arizona has a special tax rate for lottery winners that is separate from its non-resident rates.