1. Casino Tax Rates By State
2. Federal Tax Rate On Casino Winnings Money
3. Federal Withholding On Gambling Winnings
4. California Tax On Casino Winnings

Estimating Taxes on Prize Winnings. If you're looking for a rough rule of thumb to figure out what the taxes on any given prize will be, go with about a third of the prize value. So if you win a prize worth $9,000, you can expect your taxes to rise by about $3,000. Any gambling winnings, which include foreign lottery prizes, are reportable on your tax return as well. Reporting your lottery prize doesn't necessarily mean you have to pay tax on it, but if you do, it's subject to the same graduated tax rates that apply to your other income.

Whether you are reading this before or after a big win, understanding what the US tax on lottery winnings is well worth your while. Since there is a huge tax difference between states and even certain cities, spending a few minutes to grasp a few basics now could ultimately save you a fortune later on.

Lump Sum vs. Annuity Payments

Casino Tax Rates By State

First up, any jackpot winner will only get the full lottery win payout if they opt for the '30 payments over 29 years in annuities' deal. While choosing between the lump sum and annuity payments can certainly be a tough decision, if the winner chooses to take it all in one lump sum, the jackpot amount is immediately cut down. Surprisingly, 98% of lottery winners still choose to take their winnings in one lump sum payout—probably because they are too excited to realize the full weight of deductions and taxes.

If you select the 30 payments (every participating state has different annuity payment schedules), they actually increase over time to stay in line with inflation. A well-structured annuity can be designed in quite a few ways to pay out the winner over the next 30 years; 2% to 3% interest per annum added to the annuity payouts keeps up with the current pace of inflation and can be guaranteed for 30 years to a beneficiary in case of death.

• Required Reporting of Gambling Winnings. Casinos are required to report gambling winnings if they exceed a certain limit ($1,200 of slot machine winnings for example). Gambling winnings get reported on the first page of your tax return on line 21.
• And yes, I claim my winnings on my tax return. Several individuals have asked me to give an overview of online gambling and taxes. Given the out-and-out lies and falsehoods that I see on the Internet, I’m going to present an in-depth guide to online gambling and taxes in the USA. Disclaimer: We are not providing legal or tax advice here.
• The news about taxes on gambling winnings doesn’t end there. The gambling institution is required to withhold 24% of your winnings as federal withholding tax, down from the previous 25% under the tax reform law. At tax time, you’ll receive Form W-2G for all reported winnings showing the amount you won and the taxes withheld.

Federal Taxes on Lottery Wins

Next in line is the federal tax bill. Your lottery winnings are taxed just as if they were an ordinary income bonus. This means your income will be pushed into the highest federal tax rate, which is 37%. There is no way you can work around this—the U.S. government does not give tax breaks to even the luckiest people in the country.

With this in mind, the government will immediately and automatically withhold 24% of the lottery jackpot if the winner is a U.S. resident/citizen with a social security number. The remaining 13% must be paid in full come the next tax year. This seems a bit unfair when regions such as the United Kingdom and Canada do not regard a lottery win as extra income—it remains tax free until it becomes part of the winner’s estate.

What Happens if the Lottery Is Won by a Non-Resident?

U.S. residents who don’t have a social security number, for one reason or another, have 28% of the big payout withheld, and foreigners have 30% held back by the government. This is to cover the possibility of the tax balance not being honoured when April comes around.

While anyone who is visiting the country can buy a ticket, taking it out of the country is technically considered illegal. Luckily, there exist “lottery agents,” which are companies that legally buy tickets for their non-American clients. These online lottery sites are actually the easiest way to play other countries’ lotteries, as they offer many benefits and take care of most of the hassles involved in buying lottery tickets, checking them for wins, and even claiming smaller prizes. For big wins, however, you'd still need to visit the US to claim them yourself.

Federal Tax Rate On Casino Winnings Money

All the Other Taxes That Must Be Paid on Your Lottery Win

Following hard on the heels of federal taxes come state and local income taxes. If you live in New York City, a quadruple whammy of city, county, state and federal taxes will come due by the next April. This can further reduce your lump sum by another 15%.

However, if you live in Wyoming, Washington, Texas, Tennessee, South Dakota, New Hampshire or Florida, then you are not taxed on personal income, and Pennsylvania and California benevolently exempt lottery win jackpots from their state income tax if the ticket was purchased in state.

The following map breaks down lottery taxes by state:

Federal Withholding On Gambling Winnings

Giving Gifts to Your Loved Ones

Won a big sum and want to gift some or all of it (yeah, right!) to a friend or family member? This is not as straightforward as one might think. A formal agreement has to be made before the numbers have been announced; otherwise, the money given to family or friends is considered a gift and not an income. This means that the tax obligations will fall on the giver and not the recipient.

The IRS actually allows you to gift up to $15,000 tax-free per person every year, but bigger amounts will eat away at your $5.45 million lifetime exemption. If you exceed that amount, then the tax will be a flat 40%. At least gifting to a spouse is unlimited!

California Tax On Casino Winnings

Best Way to Think About Lottery Taxes

As far as taxes on lottery winnings around the world go, the U.S. definitely has some of the highest. In addition, the IRS can withhold prize money from winners under certain conditions, such as if they owe back taxes or child support, until their debts are cleared.

However, despite all the tax issues that loom over a lottery win, the excitement of being in the running for a record-breaking Powerball or Mega Millions jackpot still makes it very worthwhile. The monies generated from ticket sales go towards educational improvements and environmental protection, among other worthy causes, which makes the lottery a true case of “win-win”.

If you're feeling lucky (and don't mind sharing some of your winnings with the taxman), here are the best lotteries to play both within the US and far beyond its borders.