The huge jackpots on offer in the US Powerball and US Megamillions regularly run into the hundreds of millions. If you've won the Jackpot and are expecting a payout of millions of dollars, it would be very hard not to get carried away.
Imagine the feeling of matching the jackpot numbers in a Mega Millions draw? Choose the winning lottery numbers and on Friday you could win over $150 Million. Or tonight's US Powerball, which is also over $150 Million!
With such a big windfall coming your way you still need to take into account the taxes applicable before you mentally allocate all your winnings, or you could get an unpleasant surprise.
Federal Taxes - the first bite
Keep in mind that in the USA lottery winnings are seen as income. Therefore you’ll be expected to pay federal tax on the amount. The exact tax percentage is determined by the amount you win and the laws of the state in which the ticket was bought, but before the state gets involved, the Federal government will get its cut. State lottery operators will automatically withhold 25% of the total winnings for any amount over $600. When you're talking about a jackpot amount, this can be a lot of money. This withholdings tax increases to 30% if no US social security number is shown when the prize is collected.
Secondary taxes for your state
Apart from federal tax you’re also liable for state and local taxes in some areas. There are unique scenarios such as New York City winners who pay higher tax on winnings than individuals in the rest of the state. These laws should be taken into account when you decide on where you’re buying your next lottery ticket.
If you are purchasing your US lottery tickets online, you should find out in which US state the physical ticket purchases are made, as this will determine what (if any) taxes are owed to the state, on top of the withheld Federal taxes.
The lucky states with no taxes
Certain states in America don’t charge state income tax on lottery winnings:
- New Hampshire
- South Dakota
If your tickets are bought in these states you can choose your next lottery numbers with less trepidation about the amount you’ll have to pay in tax, though there is still the matter of the federal taxes.
So where are your tickets bought? It may be tough to think you have to pay back some of the money you’re about to win on tonight's US Powerball or Friday's US MegaMillions, but it really helps if you know what is expected of you.
Our advice as always is to get a good tax consultant on board if you win the lottery jackpot. If you are dealing with a huge win these professionals can really make a difference to the amount of money you will be able to retain.