We all have dreamt of winning the lottery. It will solve all our problems and we can just relax and enjoy our life. But, do you know you know that you have to pay a certain amount of tax on your lottery prize money. Yes, it seems unfair but it is how taxes are. If you avoid these taxes you may even get into trouble. In this article, we will inform you how to check federal taxes on lottery winnings rate using taxes on prize winnings calculator.
What is Lottery?
The lottery is more often than not referred to as a form of gambling. In a lottery, you have money at stake, and a person with a set of random numbers can win it. You need to buy a lottery ticket from a specific place that gives you a card with the number on it and they either draw numbers out as in Tambola or a random set of numbers are shown on a screen. If the numbers on your card and the screen match then you become the lottery winner.
Depending on where you live lotteries can be legal, illegal, or even government-run. The US and Europe used to have lotteries before they were declared illegal only to later return along with casinos, sweepstakes, and other such things. Even in India, you have state-run lotteries, especially in the South of India.
Lotteries can have fixed prizes or they may choose to award prizes from the revenue earned by them by the means of selling tickets. Housie is the most popular kind of lottery game played in various households or functions either for fun or for small cash prizes and is not illegal like the lottery run by various people on a larger level.
Now that we know about lotteries it’s time to bring out the taxes on prize winnings calculator to calculate the payable taxes on the sum won in a lottery.
Taxes on Prize Winnings calculator
Who wants to be the Millionaire or Kaun Banega Crorepati depending on the UK or Indian version that you may have heard about, these are game shows where the participants have to answer multiple questions to win a prize. They are given 4 options for each question and some lifelines to use.
Though it claims to make you a millionaire it later came to people’s attention that there were taxes deducted from the winnings. When a prime-time TV show was taxing your winnings then the lottery was going to be no exception since it is a way for the government to earn some revenue without increasing taxes.
So to calculate the taxes on the prize winnings you can use the taxes on prize winnings calculator and find out just exactly how much money you owe to the government.
You have two options to take this money: it can either be a lump sum payment or an annuity payment and both of these will be taxed differently. In the lump sum payment system, you are paid all your winnings minus tax amount at the same time while annuity payment sees you earn money each year in installments and it is taxed based on that year’s tax rates.
The lump sum amount received via a lottery can be as low as 52% less than the original prize amount. 24% percent of the winning is withheld by the Federal setup. After that depending on your income, filing status, place of residence, and lottery purchase you can be taxed a further 37%. Annuity payments also levy the same charges on you but their rate is determined by the tax rate set for a particular year.
If you go for an Annuity payment then you receive the full payment won by you from the lottery. An annuity payment is usually paid over 30 years with 29 installments coming your way in that period. Your winnings may also be subject to state taxes depending on which state you live in and what their laws are regarding lottery taxes.
If you use the taxes on winnings prize calculator to calculate the amount you would receive if you won a lottery of 10,00,00,000 dollars then the net amount would come to 3,01, 95,928 dollars in case of lump sum payment and 5,90,77,833 dollars in case of the annuity payment. Let us know learn about federal taxes on lottery winnings rate.
Federal Taxes on Lottery winnings rate
The laws set in place are such that if you win over 5,000 dollars in the lottery then the amount becomes taxable. Now when we talk about a lottery it is usually a big sum we are talking about like maybe something close to a million dollars or so. Here, you are required to decide if you want to withdraw the lump sum amount or want to receive an annuity payment.
Opting for the lumpsum amount usually puts you in the highest taxpayers bracket while with annuity payments the yearly installment is comparatively smaller and does not most likely put you in the highest tax bracket. Before deciding to receive payment use a taxes on winnings prize calculator to see what amount is received in hand.
As we saw above, opting for a lump sum amount may put you in the highest tax bracket which means your federal taxes on lottery winning rate comes to 37%. Also, 24% are withheld by the lottery company as soon as the winnings cross the 5,000 dollar mark.
So if you were to win a 1.5 billion dollar lottery then you would first of all only be able to claim 930 million dollars because 1.5 billion is the amount calculated with the interest that you are eligible for if you choose the annuity payment method and receive the winning sum in installments over the next 30 years.
So first we take out the 24% of 930 million which is withheld by the lottery giving company. This means 2,32,20,000 dollars are slashed from the total.
Next up we slash an additional 37% of federal tax from the amount of the winning which means a further 1,11,90,000 dollars can be waved goodbye. So the 9,30,00,000 dollars that you originally were supposed to receive now comes down to 5,85,90,000 dollars in total.
If you enter a lottery where you and your friends or family combined can buy quite a few tickets then you might want to have a contract stating everyone’s contribution and share to the tickets and the winnings. Because if you just claim your part then you fall into a comparatively smaller tax bracket whereas if you take the whole amount then the taxes on prize winnings calculator will take into account the highest tax bracket rate of 37% and you might end up paying more in taxes.
And if you receive the whole amount and then distribute it to other concerned parties then it may look like an act of gifting them and that would invite a gifting tax. Thus it is better to have a written contract well in advance which can later be produced in front of the IRS. Now you know federal taxes on lottery winnings rate.
Paying taxes on Prize winnings
Paying taxes on income and various other things already feels like a huge burden in itself and add to that the issue of having to pay taxes even on the money that you win from lotteries or games as prizes.
There are various apps on the App Store and Google Play that offer you real cash as a prize and if you win a significant amount from them then you have to pay taxes on your winnings just like a tax on the lottery. We have seen how taxes on prize winning calculator works and have seen the rate payable for lottery winnings, however, more prizes qualify for the same.
When filing your taxes you need to report the winning and prizes that you earned from games. You need to keep a record of various stuff related to your money-giving game apps. And even in case of an overall loss, you may still end up paying taxes for the same.
When paying taxes on prize winnings is concerned it is advised by the IRS that you have with you the dates and types of wagers placed, the address of the gambling place, the total amount of winnings or losings, and names of people that were with you at the establishment.
You also need to have the payment slip from the gambling place, the losing lottery ticket, and bank withdrawal statements as they are all important pieces of documents in this case. Gambling losses can be set off against winnings to a certain level if both are reported separately. And it’s not just lottery or gambling prize wins that need to be reported to the IRS.
You can win a competition or some small sweepstakes or any kind of cash prize even as less as a dollar then you have to report that as well. You might win non-cash prizes like a gift voucher or a trip for two, etc. and you have to mention its fair market value on your tax filing. If you take part in fantasy sports or enter a betting pool with your friends then winning from that also qualifies for reporting to the IRS.
You might receive a gift or an inheritance and even that isn’t safe from being taxed. So you might have to have taxes on the prize winnings calculator and a few other related stuff available with you if you found yourself in any of the situations mentioned above.
We also have taxes on lotto which may or may not be different from the taxes on lottery so we will look at it shortly after we have gone through the meaning of a lotto.
What is Lotto? Is it different from Lottery?
Lotto and lottery can a lot of times be misunderstood to be the same thing because of the identical names and the fact that are almost played out the same way except that they aren’t. While the lottery involves buying a ticket and getting the numbers on your ticket to match the numbers drawn by the lottery person or company to win the prize, the lotto is a guessing game with no real ticket being sold to you.
In the case of a lotto, you are expected to guess the numbers that you think might end up being the lottery number. Lotto is a guessing game while the lottery is a luck based game. Both win you cash prizes but have separate operators.
Your lotto operator matches the payment of the lottery in case you win it, however, the company paying you is different from the company paying the lottery winner because of the obvious difference. Now that we know what a lotto is, let’s look at the taxes on prize winnings calculator again to determine the tax payable on lotto wins.
Tax on Lotto winnings
The lotto brings you to a similar spot to the lottery. As soon as you break the tax threshold you become eligible for taxes as per the tax rate set for the year. You need to fork out the major sum of the big bucks you win.
You can avoid losing more money by going for the annuity payment option where you are given the winning amount in installments while you also earn interest on the pending amount which means the full prize amount is considered as winnings before taxes.
The other best thing to work out in your favor would be to be living in a state that does not tax your winnings. California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are part of the desired places to live when you consider avoiding state taxes on any kind of prize winnings. If you live in these states then your taxes on prize winnings calculator can stop at calculating the withheld amount and federal tax only.
On the other hand, you could be living in New York and hate yourself for it because they ask for 10.9% in state taxes which includes paying a city tax as well. So no matter how big a prize you win the tax on lotto winnings gets slashed multiple times and a good chunk of money trickles down here and there leaving you with what is still a sizable amount but with some sort of disappointment as well.
Imagine opting for a lump sum payment where 52% of the winnings is already taken away from you and post that you end up paying a state and a city tax as well, won’t it leave you with a bittersweet taste or a bad feeling? A winner recently won the 1.28 billion dollar lotto but after all the taxes and slashings were handed out only 433.7 million dollars. Now that is usually not an amount after which you put an only but you see how it was almost one-third of the original sum that made its way to the winner.
Also Read: Tax on Dividend Income: What You Should Know
How to Soften the blow of Taxes on winnings?
You have seen how bad the damage can be when you win a lottery and are forced to pay various kinds of taxes including federal taxes on lottery winnings rate of 37%. However, if you are keen on saving some money or trying to reduce the taxes owed to the government then there are a few ways you can go about it.
The first and most obvious way of reducing the amount paid in taxes would be to opt for an annuity payment option as opposed to a lump sum amount. Here not only your tax amount might considerably go up but also your winning sum increases.
There can be a significant difference between both amounts and you also don’t need to worry about protecting a very big pile of money since you get relatively smaller chunks of it over decades. If you don’t trust us on this then you can use a taxes on prize winnings calculator and check the difference for yourself.
You can kill two birds with one stone by opting for a donation. If you donate a chunk of the sum to a charitable organization then you are not just helping them out but yourself as well. There are provisions in place that make you eligible for tax deductions when you indulge in charity and so you might be able to hold onto some of the amount eligible for tax.
You can set off losses from gambling against the winning if you itemize them separately. You need to keep a record of your losses so that you can effectively apply for the deduction. However, if your losses exceed your winnings then they can’t help with deductions on tax on other items.
Lottery winnings are treated as an income for you and so you can use the standard deductions on them based on your filing status. You could also itemize stuff like mortgage payments, medical bills, and other qualifying educational expenses and related stuff to see yourself save some money.
Paying taxes on prize winnings may not be avoidable but there’s no reason to not hire a tax professional who might be of great help in such a situation. They might be able to provide you with the best scenario where you end up saving the most amount that is possible or they might help you with the taxes on prize winnings calculator and show you the difference between the amounts earned by annuity cash-out or lump sum method which might help you make the better decision.
Source Reference : https://moneymint.com/taxes-on-prize-winnings-calculator/