Lottery Tax Rates Vary Greatly By State

With Mega Millions fever sweeping the country, today we released a short report on state lottery withholding taxes. Some highlights:

• Lottery winnings of $600 or less are not reported to the IRS; winnings in excess of $5,000 are subject to a 25 percent federal withholding tax. When jackpot winners file their taxes, they find out if any of that amount gets refunded, or if they owe even more.
• Where you purchase your winning ticket matters due to state income and withholding taxes. While lottery winnings are subject to state income tax in most states, withholding tax varies from zero (California, Delaware, Pennsylvania, and the states with no state income tax) to over 12 percent in New York City.
• Arizona and Maryland have withholding rates for non-residents, so an out-of-state winner who bought a ticket in those two states could face double withholding.
• States rely heavily on lottery revenue, collecting an average of $58 per person in “profit” aside from any income tax collections. To the extent this revenue is used for general government purposes, it is a tax.
• Because state lotteries pay out an average of only 60 percent of gross revenues in prizes (compared to about 90 percent for casino slot machines or table games), state-run lotteries are only viable as a monopoly, in conjunction with a ban on private lotteries.
• Arguments that lotteries are a “voluntary” tax confuse the purchase of a product with the payment of the tax on the product.

Table 1: Lottery Withholding Tax Rates by State

Source: USA Mega.

You can access the report at http://www.taxfoundation.org/legacy/show/28083.html.