Now may be a good time to buy a lottery ticket. The most recent report shows the Mega Millions lottery is at $340 million. If no one wins at the drawing is coming Friday, the winnings will grow even more.
Although the lottery is currently set at a very large number, it is important to note those who win the lottery do not take the entire amount home. Uncle Sam will take a cut.
What is the tax rate for lottery winnings?
The Internal Revenue Service (IRS) considers lottery winnings taxable income. This leads to at least two tax impacts:
- Income tax reporting. The agency expects taxpayers to report their winnings on their Form 1040 Income Tax Return. This will likely result in the lucky taxpayer getting bumped up to a new tax bracket. This can translate to an even bigger tax bill come April.
- Taxes due with payout. For anyone that wins the Mega Millions winnings this week and chooses a lump sum payment, the IRS would likely take almost 25% of the winnings as a tax payment.
It is important to note federal tax obligations are not the only ones to take into consideration. Taxpayers will also likely have state and local tax obligations from their winnings.
As a result, those that find themselves with a significant windfall, whether from lottery winnings, inheritance or other source, advice to seek legal counsel. An attorney experienced in tax issues can discuss the tax consequences that result from the winnings and help to better ensure you have the documentation you need in the event of an audit.