What Percentage of Lottery Winnings Would be Withheld in Your State?

The Powerball Jackpot has hit $550 million and Americans in 43 states and D.C. are lining up for tickets. Sooner or later, there will be at least forty-five big winners of the current Powerball game, and forty-four of them are already known. That’s because only about half of Powerball ticket revenue is returned in the form of prizes, which is lower than the average for other lottery games. The rest of the jackpot, less the consortium’s administrative costs, fills the coffers of the forty-four states participating in Powerball.

In other words, you probably aren’t going to win the jackpot, but your state did. And in all likelihood, at least one state is going to win big twice. That’s because lottery winnings are generally taxed as ordinary income at the federal and state levels (and, where applicable, locally). In fact, in most states (and at the federal level), taxes on lottery winnings over $5,000 are withheld automatically. However, withholding rates vary and do not always track state individual income taxes.

California and Delaware do not tax state lottery winnings. Arizona and Maryland have separate resident and nonresident withholding rates. In New York, residents of New York City and Yonkers face additional withholding. And of course, withholding rates sometimes differ from the top marginal rate, typically to account for the fact that, due to various exemptions, credits, and deductions, and given the nature of graduated taxes, lottery winners are unlikely to pay the top marginal rate on all their winnings.

Naturally, winners in states which forgo individual income taxes or exempt lottery winnings fare the best. States which do not withhold offer some advantages, but the tax bill still has to be paid. At the other end of the spectrum, states with high withholding rates effectively receive a no-interest loan from the winner until tax returns are filed and a refund is processed.

Payouts vary considerably across the country, ranging from the lowest in New York at $230,240,220 for the current lump sum to a high of $260,925,000 in states either forgoing an individual income tax or exempting state lottery winnings. This includes federal withholding of 25 percent ($137.5 million), though ultimately federal liability could be much higher, particularly if the winner isn’t feeling very charitable with his or her prize.