Lottery Jackpots Continue to Climb Over $1 Billion

The Powerball jackpot will be over $1 billion when drawn later today. This is the 5th time in the last two years that a lottery jackpot has grown to over $1 billion (the larger payouts are a result of increased demand and reduced jackpot odds that were introduced in 2015).

While the odds of the top jackpot itself have been reduced, the odds of smaller jackpots have grown. The increase in total players and jackpots has led to a higher frequency of winnings for participants.

Nearly all states (45) offer some sort of lottery. Any winnings derived from scratch-offs, state lotteries or multi-state lotteries (Mega Millions or Powerball) are considered gambling winnings. These winnings are taxable in the year they are eligible to be claimed. For smaller winnings, this will normally be the day following the drawing. For larger winnings, this will be after any necessary steps to verify the winning ticket. 

There is no separate lottery tax rate. Winnings are subject to federal tax at your marginal tax rates. Certain lottery winnings are subject to 24% federal withholding, but the actual tax owed will vary based on your individual tax rate.

Since they are considered gambling winnings, all lottery winnings should be included in your gross gambling figures. All results should be tracked as a separate entry in your gambling logbook. You should also include the cost of your losing tickets with any losses from poker, table games, slot machines, keno, bingo, etc.

As with all gambling income, you are taxed in the state the winnings were earned. If this is different from your state of residence, you will receive a credit for any tax paid to your non-resident state. If you choose an annuity payout, you would follow the same filing process each year.

You cannot avoid state tax by moving after a jackpot is won. Tax is assessed based on the location of the winnings and your residence as of the date of the win. Even if you move to a state with no income tax*, you would still owe tax to the state where the winnings occurred.

If your state does not offer the lottery (such as Nevada) and you wish to get in on the action, it is important to consider where to purchase a ticket. Purchasing a ticket in California would be ideal as California does not tax lottery winnings. However, if you decided to drive to Arizona to avoid the crowds, you would owe state tax on any winnings.

*States that do not tax lottery winnings include: California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.