Lottery Winnings Calculator – How Much Is The Tax on Lottery Winnings?

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.

Taxes on Lottery Winnings in Pennsylvania

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%.

Deduct Costs When You Calculate Tax on Lottery Winnings

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.

A Practical Example to Help You Calculate Lottery 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.

Step 1: Buy Powerball PA Tickets

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.

Buy Powerball PA Ticket Online

Step 2: Watch the Lottery Results

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.

Step 3: Calculate the Total Prize

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.

Step 4: How to Claim Annuity and Lump Sum Lottery Winnings

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.

Step 5: Calculate Tax Without a Lottery Tax Calculator

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.

Tickets Price Total Winnings Gross Profit State Tax Federal Tax Net Profit
$9 $1,104 $1,095 $33.62 $262.80 $798.58

Questions on Calculating Tax on Lottery Winnings

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.

1. Who is Exempt from Paying Tax on Annuity or Lump Sum Lottery Winnings?

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.

2. How Long Does it Take to Get Lottery Winnings?

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 Online Lottery Draws

3. How Are Lottery Winnings Taxed?

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.

4. How Long Do You Have to Claim Lottery Winnings?

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.

5. Do Seniors Pay Taxes on Lottery Winnings?

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.

6. Do Lottery Winnings Count as Income in Pennsylvania?

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.

Tips to Calculate Tax on Lottery Winnings

These five simple tips can help you calculate the right amount of tax that you owe so that you avoid overpayments or fines.

  • Educate yourself – Read through our detailed guides on paying gambling taxes to understand if and when you should pay taxes in Pennsylvania.
  • Keep records – It’s easy to forget what you’ve spent over a year, so keep records of every wager and result, including dates, costs, and prizes.
  • Protect your tickets – Ink on paper tickets can fade over time so make photocopies in case you are audited by state or federal officials.
  • Play online – Use the Pennsylvania iLottery site to buy your lottery tickets online. This will facilitate record keeping and will even get you your prize money quicker.
  • Ask for help – If you need further assistance, you should ask a tax specialist or accountant or request a callback from the PDR.

How Do Lottery Winnings Compare Across the USA?

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.

State State Tax Maximum Rate
North Dakota 2.90%
Pennsylvania 3.07%
Indiana 3.23%
Colorado 4.55%
Minnesota 7.25%
Maryland 8.75%
Oregon 9.90%
New Jersey 10.75%
New York 10.90%

States That Don’t Tax Lottery Winnings

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:

  • Delaware
  • California
  • Florida
  • Mississippi
  • New Hampshire
  • Tennessee
  • Texas
  • South Dakota
  • Washington
  • Wyoming

Does Investing Lottery Winnings Reduce Your Tax Rate?

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.

Banks That Accept Lottery Winnings

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:

  • Bank of America Private Bank – A division dedicated entirely to the ultra-wealthy that requires a minimum deposit of $3 million.
  • Chase Private Client – Provides account holders with a minimum of $150,000 worth of deposits a major discount on fees and several additional benefits.
  • Citigold Private Client – Offers the bank’s best incentives to account holders with a minimum deposit of $1 million.
  • HSBC Premier – The bank’s premium service account that requires a minimum balance of $100,000.
  • UBS – Provides a free account and an extensive list of financial services as long as there is a minimum balance of $75,000.
  • Union Bank Private Advantage – Offers a bank account with no overdraft, ATM withdrawal, or monthly fees as long as the account holds a monthly balance of $250,000.

FAQs

How do you calculate federal and state taxes on lottery prizes in Pennsylvania?

Who is exempt from paying federal and state taxes on lottery payouts in PA?

Do seniors in Pennsylvania pay taxes on winnings from the lottery?

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Should I take a lottery jackpot as a lump sum or on annuity payments?

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