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How does the new tax law impact lottery winnings?

On Behalf of | Jan 5, 2018 | Tax Controversy |

Jackpots in some of the biggest lottery games have never been bigger. Mega Millions recently offered a $445 million dollar prize. Powerball has offered $550 million in winnings. Add these big winnings to the fact the new tax law cut rates for those in the highest brackets and it would seem those who win the lottery will end up even richer.

Or will they?

A piece by ABC News asked this question and the answer may be surprising. It is true that the rate has gone done. A winner that chose to take the winnings in a cash payout would originally have been taxed at 39.6 percent for federal tax obligations. The new rate is 37 percent. If a player were to win the $445 million Mega Millions prize, this would translate to $102.5 million tax bill.

Here is where it gets complicated. It is important to keep in mind that federal taxes are only one piece of the puzzle. Tax obligations are often complex and a misstep can lead to questions from the Internal Revenue Service (IRS) and even trigger an audit. When it comes to lottery winnings, state tax obligations may also apply. The old law allowed a deduction for these tax obligations on one’s federal taxes. The new law does not. In short, this often means the old and new system result in about the same overall tax obligations when it comes to lottery winnings.

However, those who live in states like California will likely benefit. Why? Because California is one of few states in the country that does not tax lottery winnings.


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