Taxes
There are a couple of certainties in Cash for Life - and one of them is taxes. Lottery prizes are considered to be income, so if you win a significant amount then the taxman will take his cut. Unfortunately, it is never as simple as taking home the full advertised amount.
You can find out here how tax laws differ between all the participating states, and see how much of your prize would be withheld where you live. It is also worth remembering that tax is such a complex issue that can be significantly impacted by an individual’s personal circumstances, so it is definitely a good idea to speak to a qualified financial professional in the event of a big win.
Federal Taxes
It doesn’t matter where you buy your ticket when it comes to federal taxes – the percentage levied by the national government is the same everywhere. No taxes are withheld on prizes up to $600, but you must report any larger winnings to the Internal Revenue Service (IRS).
You’ll be issued a W2G form for any win worth more than $600 – usually attached to your prize check – so keep it safe as you’ll need to use it when it is time to file your taxes.
Deductions kick in when you win more than $5,000, with 24 percent withheld in federal taxes at the point of payment. A higher rate applies if you cannot provide a Social Security number, or if you are a non-resident alien.
State Taxes
As well as federal taxes, you may be taxed at state level. This is where the issue of tax itself is a bit like a lottery, as winners in some locations will see their payouts hit much harder than other players.
New York, for example, has the highest rate of state tax in the U.S., and there are even local withholdings if you live in New York City or Yonkers. Florida, by contrast, has no state tax.
The following table shows the rate of tax in each of the participating states. The exact amount of tax owed also depends on your own situation, and factors such as other income, exemptions, and whether you have a debt with the state (e.g. unpaid child support).
The rate may also depend on whether you are a resident of the state where you bought your ticket. Your tax professional will help you to sort out the final amount that you owe/receive.
| State | State Withholding |
|---|---|
| Florida | No state tax on lottery prizes |
| Georgia | 5.29% on prizes above $5,000 |
| Indiana | 3.05% on prizes above $1,200 |
| Maryland | 8.75% on prizes above $5,000 |
| Missouri | 4% on prizes above $600 |
| New Jersey | Starts at 5% on prizes above $5,000 (going up to 8%) |
| New York | 10.90% on prizes above $5,000 (plus local withholdings in some locations) |
| Pennsylvania | 3.07% on prizes above $5,000 |
| Tennessee | No state tax on lottery prizes |
| Virginia | 4% on prizes above $5,000 |
Cash vs Annuity
Keep in mind that taxes are withheld regardless of whether you choose the cash or annuity option. Going with the lump sum can push you into a much higher tax bracket, whereas choosing the annuity option spreads out the income you earn - and therefore the tax liability – over a longer period of time. While this suggests that the annuity option would be preferable for anyone looking for minimal taxation, it is not always so straightforward.
Taking the lump sum can allow you to secure funds from the outset and minimize taxation in the long-term. If you have to deal with installments and have to fund trusts annually, it can get more complicated to manage your tax requirements. This is another matter that tax professionals, financial experts and attorneys can advise on in the event of a big win.