by
Christopher R. Cicalese, CPA | Dec 20, 2018
If an individual wins the lottery and opts to take the cash option, after the federal tax is taken will the individual have to claim the balance as income when it comes time to file their income tax returns?
When you win a major lottery prize, it is important to seek legal and tax advice. It is a life-changing event. If you won the Pennsylvania Lottery, you would have taxes withheld on both the federal and state level.
At the federal level, if you win over $600 and the winnings are at least 300 times your wager, you should expect to receive a Form W-2G. In addition, any winnings in excess of $5,000 from sweepstakes, wagering pools, and lotteries are subject to a 24 percent federal withholding rate (formerly 25 percent), beginning after Dec. 31, 2017. Pennsylvania requires a W-2G to be issued for prize claims over $600. Similar to the federal law, the withholding threshold is $5,000, and the state withholding rate is 3.07 percent.
Example 1 (withholding rates)
|
Lottery Prize
|
$100,000,000
|
|
Federal Withholding @ 24%
|
24,000,000
|
|
PA Withholding @ 3.07%
|
3,070,000
|
|
Net Cash Received
|
72,930,000
|
It is important to note that Example 1 only covers withholding. Under federal law, lottery winnings are considered taxable income (IRC Section 61). In our example above, you would fall in the highest tax bracket regardless of filing status, and would be subject to an income tax rate of 37 percent. Under Act 84 of 2016, Pennsylvania moved to also make lottery winnings taxable at the income tax rate of 3.07 percent.
Example 2 (income tax owed)
|
Lottery Prize
|
$100,000,000
|
|
Federal Income Tax @ 37%
|
37,000,000
|
|
PA Income Tax @ 3.07%
|
3,070,000
|
|
Net Cash After Tax
|
59,930,000
|
As you can see, when comparing the withholding amounts versus the income tax that you will owe, it appears that you will have underpaid when looking at the federal tax return by $13,000,000. Pennsylvania makes it a little easier for taxpayers since withholds are at the flat state income tax rate.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: Christopher R. Cicalese, CPA, MSTFP, is a manager at Alloy Silverstein Shapiro Adams Mulford Cicalese Wilson & Co. in Cherry Hill, N.J.