Categories
BLOG

pa state tax on lottery winnings

Best and Worst States to Pay Taxes on Lottery Winnings

Some states are far kinder to lottery winners than others

The odds against winning the Powerball lottery are about one in about 292 million, and Mega Millions is even worse: one in about 303 million.   And yet someone will eventually manage to do it, and they’ll have to pay taxes on their winnings. The federal government will want a piece of the prize, and the state taxing authority will likely have its hand out for a share as well. However, some states are much kinder than others when it comes to taxing lottery winnings.

You’re not going to receive that whole walloping amount if you take the money in a lump sum. The full advertised jackpot is the most you can win—it’s reserved for those who accept their winnings as annuities, so the money is paid out over a span of years. Either way, a somewhat significant percentage of your lottery winnings might go to taxes.

Federal Taxes on Lottery Winnings

FICA taxes—Social Security and Medicare—are employment taxes. They’re imposed on earned income, so here’s the good news: Lottery winnings are exempt from FICA taxes because they’re not earned income.

The IRS does require that lottery officials withhold income taxes from your winnings, however, if you win $5,000 or more after subtracting the cost of your ticket. The withholding rate is 24%. The IRS treats that 24% withholding just the same as it would if your employer withheld taxes from your paychecks. It will send you a refund if you don’t end up owing that much when you file your tax return.  

You’ll have to dig into those winnings a little more to pay additional taxes if you end up owing more than 24%—and that’s probable, given the tax brackets that a significant jackpot would push you into.

The top federal tax rate in tax year 2020 is 37% on incomes over $518,400 for single taxpayers, or $622,050 if you’re married and filing a joint return.   In tax year 2021, these incomes increase to $523,600 and $628,300, respectively.  

This means you’ll pay 37% income tax on the portion of your winnings that exceeds these amounts.

Other Lottery Taxes Vary by State

States with the highest top income tax rates pose a tough tax burden as well. New York is one example, particularly if you live in New York City, which will also want a cut of your winnings. New York’s top state tax rate is 8.82% as of 2020, but then you’ll have to add another 3.867% for the local tax.     That can work out to a hefty nearly 12.7% of your winnings. Your tax bill would come to almost $127,000 if you won $1 million, and about $12.7 million if you won $100 million. But if you live elsewhere in New York and don’t have to pay local income taxes, the state actually falls to fifth place overall.

The Worst States for Lottery Taxes

New Jersey comes in as the worst state for lottery taxes, with a 10.75% top tax rate as of 2020. Oregon takes second place at 9.9%. Minnesota comes in third at 9.85%, followed by the District of Columbia at 8.95% and New York at 8.82%.  

Rounding out the list of the 10 states with high tax rates are:

  • Vermont: 8.7%
  • Iowa: 8.53%
  • Wisconsin: 7.65%
  • Maine: 7.15%
  • South Carolina: 7.0%

The hit you’ll take depends on the exact threshold where these top tax rates kick in and on how much you’ve won. For example, you’d only have to pay 9.9% in Oregon if you won more than $125 million, and you’d pay this rate only on the portion of your winnings that exceeds this amount. You’d pay 9% if you won $124,999,999 or less.  

All this assumes that your state participates in a national lottery and that it taxes lottery winnings. For example, Hawaii’s top income tax rate is a hefty 11%, but you can’t play Powerball there. It’s one of six states that don’t participate, and it’s a very long swim to the mainland to purchase a lottery ticket. Other states that don’t participate in Powerball are Alabama, Alaska, Mississippi, Nevada, and Utah.

The Kindest States for Lottery Taxes

Obviously, your best bet for avoiding lottery taxes is to live in one of the states that doesn’t have an income tax at all as of 2020: Florida, South Dakota, Texas, Washington, and Wyoming. Alaska and Nevada don’t tax income, either, but they don’t participate in national lotteries.  

Then there are an additional couple of states that kindly refrain from taxing lottery winnings: California and Delaware will generously let you keep your jackpot tax-free.   This is particularly convenient in California, where the top tax rate is even worse than what you’d pay in New York City: 13.30% as of 2020.  

That leaves us with the states with the lowest top tax rates as of 2020:  

  • Tennessee: 1%
  • North Dakota: 2.90%
  • Pennsylvania: 3.07%
  • Indiana: 3.23%
  • Michigan: 4.25%
  • Arizona: 4.50%
  • Colorado: 4.63%
  • New Mexico: 4.90%
  • Illinois and Utah: 4.95%
  • Ohio: 4.797% 

Tennessee and New Hampshire tax only interest and dividend income, and Tennessee is repealing even that tax beginning in 2021.

State Lotteries vs. Other Winnings

Keep in mind that these rankings are for national lottery winnings. As a general rule, other types of winnings are considered income, but they’re not always subject to the withholding rule, and they might not be subject to FICA taxes. However, you might still have to pay income tax on the money.

Some Small Tax Perks

You can deduct gambling losses if you itemize and if you spend more money trying to win than you actually end up winning, but only up to the amount of your winnings. In other words, you wouldn’t have to pay a tax on your prize money, but you couldn’t use the balance of your losses to offset your other income.  

Another deduction you can take on your federal return to try to nip away at your tax bill is for the income taxes you must pay to your state on your winnings. Unfortunately, the Tax Cuts and Jobs Act limits this itemized deduction to $10,000 for tax years 2018 through 2025, and to just $5,000 if you’re married and filing a separate return.   This is just a drop in the bucket if your winnings are significant.

Lottery winnings aren’t income tax-free. The IRS and some states will take a share of your windfall, but some states don’t tax lottery winnings at all.

Pennsylvania Gambling & Taxes 2021

After the thrill of collecting gambling winnings, comes questions about taxes.

Yes, gambling income, which includes winnings from slots, table games, horse racing, sports betting, lottery games, jackpots, and the like, is considered taxable income. As such, you are required to report them on your tax return. The car, boat, or Harley Davidson and other noncash prizes also need to be reported.

There are plenty of questions surrounding Pennsylvania taxes and gambling winnings. Now there are even more with the advent of sports betting, betting apps, and online casinos in Pennsylvania.

Here are some answers.

How much are my gambling winnings taxed?

Casinos withhold 25% of winnings for those who provide a Social Security number. If you do not provide your Social Security number, the payer may withhold 28%.

Currently, Pennsylvania’s personal income tax is a flat tax rate of 3.07% which applies to all taxable income, including gambling and lottery winnings. PA has the lowest rate of all states with a flat tax.

The new regular withholding rate

Effective for taxable years beginning after December 31, 2017, the withholding rate under Section 3402(q) applicable to winnings of $5,000 or more from sweepstakes, wagering pools, certain parimutuel pools, jai alai, and lotteries (formerly 25%) is 24%.

Federal Form W-2G, Certain Gambling Winnings

The organization that pays the winnings, in most cases, the casino, is responsible for sending the recipient of the winnings Form W-2G, Certain Gambling Winnings.

Form W-2G reports the amount of winnings to you as well as to the IRS.

The payer is required to send Form W2G only if the winner reaches the following thresholds:

  • The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine
  • The winnings (reduced by the wager) are $1,500 or more from a keno game
  • The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament
  • The winnings (except winnings from bingo, slot machines, keno, and poker tournaments), reduced by the wager, are:
    • $600 or more, and
    • At least 300 times the amount of the wager
  • The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding)

How to report PA gambling winnings on taxes

According to the IRS, you must report the full amount of your gambling winnings each year on your federal taxes. First, you report gambling winnings as

You may receive a Form W-2G showing the amount of your gambling winnings and any tax withheld. Include the amount from box 1 as “Other Income” on Form 1040, Schedule 1 (PDF).

That number then goes on your U.S. Individual Income Tax Return Form 1040 (PDF), line 7a (designated “Other Income”). You should attach the Schedule 1 form to your Form 1040.

Include the amount shown in box 2 on the W-2G on line 17 (designated as federal income tax withheld) of your Income Tax Return (Form 1040).

Pennsylvania state taxes for gambling

In addition to federal taxes payable to the IRS, Pennsylvania levies a 3.07% tax on gambling income.

You should report your Pennsylvania taxable winnings on PA-40 Schedule T (PDF). Include the total winnings from line 6 of Schedule T on your Pennsylvania Income Tax Return PA-40 (PDF), line 8 (“Gambling and Lottery Winnings”).

If your gambling winnings come during a trip to another state or country, you are still required to report.

Michelle Malloy, Esq. at AUA Capital Management, LLC in Conshohocken, Pennsylvania, commented:

“Pennsylvania takes the position that they are entitled to tax a portion of your worldwide income based on certain income items (wages, interests, dividends, capital gains, gambling winnings, lottery winnings, etc).”

What if I don’t receive a Form W2-G?

If you did not receive Form W-2G, your winnings are still considered taxable income and should be reported. A payer is required to issue you a Form W-2G if you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding.

According to Malloy:

“You are required to report all gambling winnings for federal and Pennsylvania taxes. If you hit a certain threshold they (the casino) will withhold money. In the instance where a casino doesn’t do their job and and fails to send you a W2-G you are still required to report your winnings, or you run the risk of underreporting your taxable income for the year.”

Do I have to pay taxes if a group of people win the lottery?

What happens when a group of coworkers chip in on a lottery ticket that wins? What about you and a friend who put money on a long-shot team to win the championship?

Meet Form 5754 (PDF). Payers use this form to prepare Form W-2G when the person receiving gambling winnings subject to reporting or withholding is not the actual winner or is a member of a group of two or more people sharing the winnings.

Don’t send Form 5754 to the IRS. Keep a copy for your records and return the form to the payer (usually the casino) for preparation of Form W-2G for each person listed as winners.

Are there any deductions available for taxes related to gambling?

Gambling losses can be deducted. However, they must be itemized on line 28 of Schedule A, Form 1040.

Also, you cannot deduct more than your winnings.

Expenses related to any gambling or lottery activities, (like your dinner at the steakhouse, celebratory drinks from the bar, or cost of hotel room) cannot be deducted.

If you are going to deduct gambling losses, keep these records:

  • The date and type of each wager
  • The name and location of the bet
  • The amount won or lost
  • Wagering tickets
  • Canceled checks
  • Credit card records

When using a players club/members card, casinos can track players’ spend. Therefore, you can request a win/loss report that will give you a fairly good sense of your activity in a casino. Online casino players can request the same report and most sites should be able to provide it without issue.

“A lot of people may under-report,” explained Malloy. “They might win $10,000 but have $3,000 of expenses so they think they are just going to report $7,000. That can be an issue, as Pennsylvania does not allow a deduction for expenses. If you win a lot of money in June, for example, you might want to make an estimated tax payment [due Sept. 15 and Jan. 15] so you don’t have an underpayment penalty the following April.”

How to claim gambling winnings and/or losses

Pennsylvania provides a helpful resource to determine how to claim gambling winnings and/or losses.

There is a prompt where you can start a ten-minute interview.

Be sure to have the following information ready:

  • Your and your spouse’s filing status
  • Amount of your gambling winnings and losses
  • Any information provided to you on a Form W-2G

Taxes on multistate lotteries

The Pennsylvania Department of Revenue considers multi-state lottery prizes, like those from Powerball and Mega Millions, awarded on tickets purchased through a licensed Pennsylvania state lottery ticket vendor, a prize by the Pennsylvania Lottery.

“Such prizes are considered Pennsylvania source income and both residents and nonresidents are subject to tax on such income if the prize is a cash prize. Multistate lottery prizes awarded on tickets purchased through a vendor in another state lottery are considered prizes awarded by that state lottery. Such prizes are not considered Pennsylvania source income and only residents are taxed on such income regardless of whether the prize is a cash or noncash prize.”

Due to a 2016 law change, any cash prize won from a Powerball of Mega Millions ticket in any state is taxable for state purposes, in addition to federal taxes.

What happens if you win a few thousand dollars on a winning PA lottery ticket?

Lottery winnings are included in taxable income. Pennsylvania Lottery winners of an individual prize valued at more than $600 will receive a Form W2-G by mail.

If your spouse also wins, they must report their winnings separately.

“For a significant windfall, like over $5 million, it definitely makes sense to talk to an attorney or accountant to determine if they should take a lump sum payout or annuity. They may also need to think about estate tax planning, financial planning and/or asset protection planning for their windfall,” said Malloy.

Sports betting winnings and taxes

Sports betting winnings are taxable income.

“Gambling winnings are fully taxable and you must report the income on your tax return. Gambling income includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.”

Even though sports betting isn’t specifically listed, it falls under the umbrella of “gambling winnings.”

Wherever your sports betting win occurred – at the OTB, the casino, on a sports betting app – they payer should send Form W-2G.

Sports betting losses might also be used as deductions if you itemize your deductions and keep a detailed record of wins and losses.

Based on your tax bracket, sports bettors in Pennsylvania could owe up to 35 % of winnings to the federal government in addition to the 3.07 % Pennsylvania taxes net gambling winnings.

Online gambling and taxes

Sports betting apps and online casinos provide unmatched convenience. You may also enjoy the anonymity of playing behind a screen name instead of in person. However, it still comes with the same tax responsibilities. Online gambling winnings are considered taxable income at the same rate as other gambling winnings.

For online gambling winnings, the payer is required to send Form W2G only if the winner reaches the following thresholds:

  • The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine
  • The winnings (reduced by the wager) are $1,500 or more from a keno game
  • The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament
  • The winnings (except winnings from bingo, slot machines, keno, and poker tournaments), reduced by the wager, are:
    • $600 or more, and
    • At least 300 times the amount of the wager
  • The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding)

In terms of deductions for taxes, players can request a report from online casinos detailing wins and losses.

Be it a slot win in a casino, a Lottery jackpot, sports betting wins, or online poker earnings, we have what you need to know to cover your PA tax bases. ]]>