How are Lottery Winnings Taxed?
The odds of winning a Powerball jackpot are famously slim — you have a significantly better chance of hitting three consecutive holes-in-one on the golf course than you do hitting those six specific numbers.
Should you be so fortunate, the odds of being taxed on any lottery winnings, however, are as good as breathing. This holds true if you capture a major, multi-state prize or one of the daily games offered by the Georgia Lottery. The independent non-profit Tax Foundation rates Georgia as one of the worst states to win the lottery, as far as taxes go.”Worst” is all in your perspective, especially on prizes of almost $250 million, but here’s how lottery winnings are taxed in Georgia.
What is the Tax Rate in Georgia?
All prizes of at least $600 are reported to the Internal Revenue Service and the Georgia Department of Revenue, and are taxable. Automatic withholding begins with prizes of $5,000. Those rates are 24 percent for federal taxes and 6 percent for state taxes.
But that is not the whole of the tax burden. Because lottery winnings are income, large prizes will push a winner firmly into the highest federal bracket. That threshold dropped from 39.6 percent to 37 percent when the new tax law took effect in January, but a winner still owes the difference between the 24 percent withheld and 37 percent. That impact is less if smaller prizes don’t push a winner into the top bracket.
Another change in the new law caps the amount of paid state taxes that can be deducted on a federal return. That could offset any advantage of the lower federal rate.
Georgia is not among the 14 states (plus District of Columbia) that allows for local income tax, so that’s good news. However, the 6 percent state tax is the primary reason for the Tax Foundation’s negative rating. New York, Maryland, Washington D.C. and Oregon are the worst states on the list, all with rates above 8 percent. All four of those states are among those that permit municipalities to levy income tax.
Lottery Tax Examples
So purely on the basis of state and federal rates, what could a lottery winner in Georgia expect to take home? A Feb. 28 Powerball jackpot was estimated at $293 million, with a lump sum payout (which most people take) of $173 million. Off that amount:
Federal withholding = $41.5 million
State withholding = $10.4 million
Take-home payout = $121.1 million
Once federal taxes are to be filed, the winner would owe another $22.5 million, for a full federal burden of $64 million and a final award of $98.6 million.
Let’s craft another example using a more realistic prize. Two players claimed $500,000 prizes in the Georgia Lottery’s $500,000 Gold Rush Game. Using the same math as above:
Federal withholding = $120,000
State withholding = $30,000
Take-home payout = $350,000
Again, the half-million in income lands a winner in the highest tax bracket and they will owe another $65,000 on federal filing day. The final award is $285,000.
Of course, taxes are not calculated in a vacuum. Certain vehicles may allow a winner to shelter some of the prize. Annual, non-charitable gifts to family and friends of $15,000 or less are not taxed. Charitable donations still can be deducted, though the standard deduction is now doubled so fewer individuals will itemize. And if you manage to stay away from the pitfalls that have snared so many other big lottery winners, proper estate planning can provide for future generations.