Winning the lottery is a moment that many of us have dreamt of. However, before you can start planning what to do with your prize, you must remember to calculate the taxes on lottery winnings. In this guide, we’ve explained how to do this for both state and federal taxes. We’ve also compared PA tax lottery tax rules to those in other states and listed the banks that would allow you to deposit your prize money.
PA residents that win a lottery prize either in or outside the state must pay a state income tax of 3.07%. Non-residents must also pay tax if the ticket was sold to them by an authorized Pennsylvania Lottery retailer. There is no minimum threshold set on winnings from the lottery. This means that even small prizes are subject to state tax. However, if the lottery is awarding a non-cash prize, state tax won’t apply.
The federal tax rate only applies when the prize value is equal to or higher than $600. However, this applies to both cash and non-cash prizes, and the applicable minimum tax rate for US residents, irrespective of their state of residence, is 24%.
When you calculate winnings, it’s a good idea to deduct applicable costs. According to the Pennsylvania Department of Revenue, you can remove the ticket prices of state and out-of-state lotteries purchased in the same year as the winning ticket. However, it’s very important that you keep proof of these costs, mainly the tickets themselves, in case you need to prove your deductions.
No other costs associated with playing the lottery, such as fuel or accommodation, can be deducted from your winnings.
The best way to understand tax on winnings is with an example. In the following sections, we’ve provided a step-by-step tutorial to help you buy Powerball PA tickets, claim your prize, and calculate your taxes.
Let’s imagine that you’ve decided to buy four tickets online since it’s quicker and more convenient than visiting a retailer. Since you already know how to play the Powerball PA, you decide to buy three normal tickets and add Power Play to the fourth. This means that the total cost of your tickets is $9.
Since you bought our tickets on a Sunday, the next draw day is the following Monday at 10.59 pm. You watch closely as the five white numbers and the Powerball number are drawn and you’re elated when you realize that you’ve won a prize from three tickets, including the one with the Power Play.
Before you can claim our winnings, you need to calculate our prize money. On one ticket, you only won the Powerball number, so this got a prize of $4. The second winning ticket had three correct white numbers and the Powerball number, so that got you an additional $100. Finally, the ticket with Power Play brought you a $1,000 payout since the multiplier was 10x and you correctly guessed four white numbers. In all, you’ve won $1,104 with a total ticket cost of $9.
You purchased your tickets from the Pennsylvania Online Lottery website. Since your prize is over $600, you’ll need to claim it by filling in an online form. You will then receive your money securely in your iLottery account and will be able to withdraw it using ACH, PayPal, or other supported withdrawal options.
It’s now time to bring out your lottery tax calculator and figure out what you owe to the state and if federal tax applies in this case. Since your lottery tickets are stored safely online, you start by deducting the cost of your wagers, $9, from the total prize, $1,104. This leaves a prize of $1,095.
Since the total prize money exceeds the $600 threshold, the federal tax will also apply.
To calculate state tax, you should first divide the income tax of 3.07% by 100 to get a basis point of 0.0307. You should then multiply this number by your prize, so 0.0307 x $1,095 = $33.62.
Similarly, to calculate IRS tax, you should first turn the 24% federal tax rate into a basis point by dividing it by 100. This gets you a figure of 0.24 which you should multiply by your prize, so 0.24 x $1,095 = $262.80.
When calculating your taxes, it’s important that you enter the correct information. If you make a mistake you might pay more or less tax than is necessary, and in the latter case, fines may apply. The following are the most common mistakes and how to avoid them.
All lottery winnings count for taxes on that prize in PA. Moreover, if you’ve won more than $600 in a year, you will also need to pay federal tax. There are no exemptions, not even for senior citizens, as we explain in our detailed gambling tax guide.
If you buy your lottery ticket from a retailer, you can claim your prize from the same location as long as it doesn’t exceed $2,500. However, if the retailer is unable to dispense the prize money, or if the prize money is over $2,500, you will need to send your claim by mail. It can take up to six weeks to receive your prize.
To shorten the time taken to receive your prize, you can buy your ticket online. Various state and multi-state lotteries, such as the Megaball PA, can now be purchased instantly from the Pennsylvania iLottery site.
State and any applicable federal taxes on your winnings must be paid in the next calendar year following the draw. This means that if you participated in a December draw in 2023 and got your winnings in January 2024, you would need to pay tax for your prize in 2024.
Pennsylvania has a very straightforward method of calculating income tax on lottery payouts. A flat income tax rate of 3.07% applies to all winnings from land-based establishments and PA online gambling sites. The IRS collects a minimum 24% resident tax rate on all lottery prizes with a value of $600 or more. However, the federal thresholds for other forms of gambling, such as slots or sports betting, differ from these. Moreover, the rate may differ if your taxable income surpasses a threshold. In such instances, your applicable federal tax bracket would be higher.
In most cases, you’ve got exactly one year from the draw day to claim your winnings. Unless you’ve bought the ticket from the Pennsylvania iLottery site, you must present a paper ticket to make a valid claim. If you don’t claim and receive your winnings, you won’t need to pay any state or federal taxes.
Yes, even though seniors pay fewer taxes, they are not exempt from paying gambling taxes. However, seniors should fill in the IRS form 1040-SR when submitting to declare their prizes and any other income.
Yes, all winnings from the lottery and other forms of gambling are considered income by the Commonwealth of Pennsylvania. This means that all prize winners are liable to pay a tax of 3.07% after applicable deductions have been made.
These five simple tips can help you calculate the right amount of tax that you owe so that you avoid overpayments or fines.
Pennsylvania has one of the lowest tax rates for lottery payouts. In the following table, we’ve listed some of the best and worst states for lottery prize taxes. Some states, such as New Jersey and New York, apply different tax rates on winnings based on your overall income.
In case you’re wondering, there are a few states which don’t require you to pay taxes on lottery payouts. However, federal tax still applies. These states are:
State and federal taxes are applicable at the moment that the prize is transferred to you. What you decide to do with the prize money is up to you, but no action, such as investing it, will reduce your tax liability.
If you are looking to reduce your tax bill legally, you can ask the awarding authority to donate part of your prize to a registered charitable organization. There is a limit to how much tax you can deduct from such a donation and it’s best to engage the services of a tax specialist.
When you win a lottery jackpot, you’ll be offered a choice between taking a lump sum payment or an annuity. Both options have different tax implications, however, by choosing the lump sum payment, you will need to pay the total applicable taxes at a go. Choosing the annuity will usually lead to a higher overall payment, and while taxes would still apply, you can reduce them by moving to a state that does not tax lottery prizes.
You should have no trouble depositing smaller prizes in your existing bank account. As part of their due diligence exercises, banks may require you to show proof of your income, such as by providing a copy of the winning ticket.
If you’ve won a jackpot or a million-dollar prize, you might want to consider depositing your money in a specialized bank account. These are the top banks that cater to millionaires in the US:
To determine how much tax you owe, you must first calculate your net profit by deducting applicable losses. Apply the 3.07% state tax rate to this profit, and, if the net profit is $600 or more, apply the 24% federal tax rate.
Every resident and non-resident that plays a Pennsylvania Lottery game, including Powerball and Mega Millions, is liable to pay a tax of 3.07% on any prizes. However, federal tax only applies when the net profit is $600 or more.
Yes, senior residents must still pay a tax of 3.07% on winnings from the lottery and any other form of gambling. Federal tax would also apply if the value of the prize is equal to or higher than $600.
While every player would like to have no lottery winnings taxes, this is not possible. You can reduce your winnings by deducting permitted and itemized losses and costs. In some cases, you can also donate part of your prize to reduce its value and pay less tax. Moreover, if you’re offered an annuity prize, you could opt for it and move to a state that does not have a tax on lottery prizes.
For most lotteries in Pennsylvania, you have one year from the draw day to claim your prize. If you fail to make a suitable claim within this timeframe, you’ll lose your right to the prize. In such instances, you would not owe any tax since you never got a prize.
In most cases, it’s advisable to go for the annuity payments since these add up to a greater jackpot prize over time. Taking annuity payments will also give you the opportunity to move to another state and pay less taxes for the remaining payments. However, while moving state might affect your state taxes, it won’t change your taxable income for the IRS.
An accurate lottery tax calculator, such as the one featured in this article, can help you calculate your rate of taxable income and tax brackets for the IRS. However, you can also use a normal calculator to compile your lottery taxes by following our example.