How are Lottery Winnings Taxed?
Lucky Nashua, NH Resident Seeks Advice
Lottery, and other winnings throughout the year, that are $600 or more are taxed by the IRS. If the money is received as a lump sum, you will pay the full tax amount. If it is drawn out over several years, you will be taxed by what you receive for each calendar year. The federal tax on winnings is 24% when and the local government will also take their own portion for taxes. You can expect to pay between 30-35% of taxes on your winnings.
A Nashua resident has received a sizable winning in the lottery and was looking for tax advice. He sought the experts at Merrimack Tax Associates.
Why You Need to Report Winnings as Income
Any time you win $600 or more, you should file a form W-2G, that you receive from the paying institution, with your federal tax return. At the same time the lottery agency or gambling institution, will also submit this form to the IRS reporting your winnings. Even if you do not receive the form, you are still expected by the IRS to claim this won money on your federal taxes. Not doing so can have serious repercussions, including additional interest and penalties owed.
Lump Sum or Annuity Payments, which is More Tax Advantageous?
For a significant win, you may have the choice or receiving the money as one lump sum or payments made over many years. Depending on the amount of money, receiving this as a lump sum may bump you into a higher tax bracket for the year that you win the lottery. Taking your income and current tax bracket into consideration, it can sometimes be more tax advantageous to instead take the annuity payments, which may keep you at a more reasonable tax level.
The Nashua resident took the time to sit down with Merrimack Tax Associates and he was able to come up with a plan to receive his winnings that would offer him the most tax advantages.