Does the New Tax Law Help Lottery Winners? It Depends

So you won the lottery. You hit it big. You’re rich!

And you want to keep as much of your newly found wealth as possible.

Well, lucky you. Your win came after President Trump signed the new tax bill into law. It’s supposed to benefit the wealthy. You don’t have to turn over as much of your money to Uncle Sam. Right?

Maybe. That depends on where you bought your ticket.

If you struck it rich in one of the states that has no income tax or doesn’t charge income tax on lottery winnings, you’re doubly lucky. Instead of paying a top federal tax rate of 39.6 percent, you now are on the hook for a mere 37 percent. That 2.6 percent difference can mean a lot when you’re taking it from a lottery windfall.

In the case of a $440 million jackpot, one financial website calculated the savings for a winner taking the lump-sum payout of more than $7 million in federal taxes not owed.

Most people take lump sums. The other option is an annuity. But even with an annuity, when the jackpot is large, the annuity payments can easily be high enough to put the winner in the top income tax bracket. So they also benefit from the lower tax rates.

But there’s a catch.

If you live in a state that taxes lottery winnings as income, the new tax law might not let you keep more money. In some high-taxed states, like New York, you might even be worse off than before. That’s because the new law caps at $10,000 the amount of state taxes you can deduct from your federal income.

Under the previous law, there was no such cap.

Just a handful of states don’t levy their income own taxes on lottery winnings. They include California, Delaware, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

For the rest of the country, the restriction on the deduction for state and local income taxes may cancel out or reduce any savings from the lower federal tax rate. In some cases, lottery winners may have higher taxes overall under the new law.

Winners in New York City will be the hardest hit by the change because the city has the highest state and local taxes.

The New York state income tax is 8.82 percent, while the city tax is 3.876 percent. On a big lottery win, those taxes will easily climb over $10,000 and overcome any savings in federal taxes from the new law.

6 Cited Research Articles

  1. McFetridge, S. (2018, January 5). Despite law changes, lottery winners will face big tax bills. Retrieved from https://www.desmoinesregister.com/story/news/2018/01/05/despite-law-changes-lottery-winners-face-big-tax-bills/1007298001/
  2. Scarboro, M. et al. (2018, January 5). What Percentage of Lottery Winnings Would be Withheld in Your State? Retrieved from https://taxfoundation.org/state-lottery-tax-2018/
  3. Isidore, C. (2018, January 3). What tax reform means for the next big lottery winner. Retrieved from http://money.cnn.com/2018/01/03/news/powerball-mega-millions-tax-reform/index.html
  4. Salisbury, I. (2018, January 2). The Next Powerball Winner Could Keep an Extra $7 Million thanks to the New Tax Law. Retrieved from http://time.com/money/5084041/powerball-jackpot-taxes-mega-millions/
  5. Cole, L.L. (2018, February 14). Here’s how your tax bracket will change in 2018. Retrieved http://www.businessinsider.com/tax-brackets-2018-trump-tax-plan-chart-2017-12
  6. USA Mega. (n.d.). Mega Millions Jackpot Analysis. Retrieved fro https://www.usamega.com/mega-millions-jackpot.asp
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