Would a lottery winner have to claim the after-tax winnings as income on their tax returns?

Dec 20, 2018
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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.

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Disclaimer:
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.