Taxes On Lottery Winnings by State 2021
There’s no doubt that winning the lottery is exciting and can significantly help the winner financially; however, the winner must not be too quick to spend all of his or her winnings. Like other income in the United States, the IRS taxes lottery winnings.
Lottery winnings are considered ordinary taxable income for both federal and state tax purposes. Winnings are taxed the same as wages or salaries are, and the total amount the winner receives must be reported on their tax return each year. Before the winner receives any of the money, however, the IRS automatically takes 24% of the winnings. The rest of the winnings are expected to be paid by the winner when filing the return.
What is the tax rate for lottery winnings? For federal taxes, lottery winnings are taxed according to the federal tax brackets. Federal tax brackets are progressive, so portions of the winnings are taxed at different rates, and could be as high as 37%. State income taxes vary by location. Some states do not have a state income tax, while others may withhold up to 8.82%.
The states that do not levy an individual income tax are:
Six states do not have a lottery: Alabama, Alaska, Hawaii, Mississippi, Nevada, and Utah. Two states, California and Delaware, do have a lottery but do not tax winnings.
If the winner buys a winning ticket in a state that they do not live in, most states will not withhold the winnings. Out of the 43 states that participate in multistate lotteries, only Arizona and Maryland tax the winnings of people who live out of state.
Here are the 10 states with the highest taxes on lottery winnings:
- New York (8.82%)
- Maryland (8.75%)
- New Jersey (8.00%)
- Oregon (8.00%)
- Wisconsin (7.65%)
- Minnesota (7.25%)
- Arkansas (7.00%)
- South Carolina (7.00%)
- Connecticut (6.99%)
- Idaho (6.92%)
New Jersey Gambling and Taxes
Part of the fun of gambling is the suspense.
It wouldn’t be as exciting if you knew the outcome of your wagers ahead of time.
Another plus is that many types of gambling are legal in New Jersey. Casino gambling, horse racing, the state lottery, bingo and most recently, sports betting.
Gambling is even more fun when you win.
And, when you gamble at authorized NJ betting sites, you will be paid.
What you may not have given much thought to, though, is that NJ gambling winnings are taxable. Winnings obtained from illegal gambling applies here as well.
In this article, we will tell you everything you need to know about the federal and New Jersey state laws concerning gambling winnings and taxes.
Are NJ gambling winnings taxable?
According to the IRS, gambling winnings in any state, including New Jersey, “are fully taxable and you must report the income on your tax return. Gambling income includes but isn’t limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.”
The IRS doesn’t mention sports betting, but winnings therefrom also count as gambling winnings and are, thus, taxable.
How much are NJ gambling winnings taxed?
Whether you’re a New Jersey resident doesn’t have any bearing on your liability to pay federal and state taxes on your winnings.
So, this includes the total of your winnings, if any, that is withheld for state taxes.
However, the type of gambling and, whether the winnings are from a retail or online site, does matter.
Taxes on NJ state lottery winnings
Prior to 2009, NJ state lottery winnings were not taxable.
However, effective January 2009, New Jersey Lottery winnings in excess of $10,000 became subject to the state gross income tax.
The percentages withheld from the state lottery payouts of more than $10,000 are as follows.
If the payee provides a valid Taxpayer Identification Number (TIN):
- 5% of payouts of $10,001 to $500,000.
- 8% of payouts more than $500,000.
If the payee does not provide a valid TIN:
- All payouts of more than $10,000 are taxed at 8%.
Rules on shared and multiple lottery wins
If two or more people win a given lottery prize and split the proceeds, as long as the total prize exceeds $10,000, it is taxed.
Each recipient must, therefore, assume liability for his or her share of the taxes even if the individual’s share does not exceed $10,000.
Furthermore, if a person wins the NJ Lottery more than once in the same year, each win is considered separately in determining whether or not it is taxed.
For example, a person who wins the lottery twice in one year, once for $6,000 and once for $5,000, would not have to pay any state tax on those winnings.
However, a person with a single state lottery win of $11,000 would have 5% of that amount withheld for state taxes.
Federal and state taxes on other NJ gambling winnings
The state lottery is one form of gambling in New Jersey for which winnings are taxable.
In fact, gambling operators must report individual wins over a certain amount for some types of gambling to the IRS.
Federal tax form W2-G
All New Jersey-licensed gambling establishments, including casinos and racetracks, are required by federal law to report certain gambling winnings to the IRS on Form W2-G.
However, the minimum win for this to happen varies, depending on the type of gambling, as indicated below:
- Horse Racing: Winnings exceeding $600 on a $2 wager or 300x any larger amount wagered.
- Slot Machines and Bingo: Winnings (not reduced by the amount wagered) that exceed $1,200.
- Keno: Winnings (reduced by the amount wagered) that exceed $1,500.
- Poker Tournaments: Winnings (reduced by the amount of the buy-in) that are more than $5,000.
Amount withheld from winnings for federal and state taxes
In every such instance, the gambling establishment must file Form W2-G to report the win to the IRS and send a copy of the form to the payee.
Since winners need this info to prepare their tax returns, they will usually receive a copy of Form W2-G in January of the following year.
Typically, the gambling facility, where the win occurred, will withhold a certain amount of the gambler’s winnings for federal and state taxes.
Before 2018, the standard withholding amount for federal taxes was 25% for those who provided a valid TIN and 28% for those who didn’t.
However, starting in 2018, the withholding rate for federal taxes is now a uniform 24%.
The amount withheld for state taxes varies from state to state.
In New Jersey, it is only 3%. That is the tax rate regardless of whether you live in New Jersey or not as long as the reportable winning took place in New Jersey.
The winner’s responsibility
The gambling facility must file Form W2-G and withhold the appropriate tax from your winnings if it meets the specified criteria.
But whether it does so or not, you still need to report your net gambling winnings as income when you file your tax return.
Obviously, gamblers who win big will find it disappointing, in most instances, to have to fork over a sizable chunk to the government.
But here’s some other news that may help you.
Ultimately, the amount of tax you owe on your gambling winnings will depend on your taxable income bracket. And, if you itemize your deductions, the extent to which you could offset those winnings with documentable gambling losses.
How gambling losses can help offset winnings
You can deduct your gambling losses, but only to the extent of your winnings.
If you lost more money gambling than you won that year, you could only deduct losses up to the amount reported as winnings. You cannot report any amount above that.
In other words, you can’t report your gambling income as a negative amount.
However, you can combine your losses from different types of gambling.
For example, if you won a big jackpot on a slots machine, but lost money on other casino games, poker and sports betting, then those losses count.
On the flip side, due to the recent substantial increase in the allotted amount you can take on your tax return as a standard deduction, itemizing your deductions may not be more beneficial tax-wise after all.
Seeking the advice and services of a professional accountant could be a worthwhile investment.
Which tax forms should you use to report gambling wins and losses?
If you are a casual gambler and received Form W-2G, be sure to include the winnings on that form. Also, include any tax withheld and any other gambling winnings you are reporting for the year on Form 1040 as “Other Income.”
Then, if you itemize your deductions, enter any offsetting gambling losses on line 28 of Schedule A (Other Miscellaneous Deductions.)
If it turns out that you paid more in taxes than you should have on your gambling winnings, you will receive a refund.
However, if too little money was withheld or you have other gambling winnings to report, you could owe more money in taxes.
In fact, casinos are not required to issue a W2-G and withhold taxes for winnings at table games (blackjack, roulette, baccarat and craps).
However, casinos expect players to keep track of such wins and include them on their tax returns.
The same applies to winnings from sports bets. You may be able to offset those wins, at least in part, with your gambling losses and other related expenses.
What happens if you receive a W-2G but don’t report the income on your tax return?
If you receive Form W-2G, whether money was withheld from your winnings or not, ignoring it is a mistake.
You need to file a tax return and show this income on the appropriate forms. If you don’t, the IRS will likely send you Form CP2000, which is a notice of underreported income.
You will be assessed additional taxes, penalties and interest on your unreported or underreported gambling winnings.
NJ taxes on sports betting winnings
If you win money from sports betting, you must pay taxes on those winnings as you would on other forms of gambling.
Furthermore, if you win more than $5,000 from betting during the calendar year, the NJ casino or racetrack is required to file a W-2G with the IRS.
In fact, for anyone betting anonymously at a retail sportsbook, keeping accurate tabs on wins for a year seems impossible.
Of course, any betting that you do online or through a mobile app is tracked within your registered betting account. As a result, the gambling operator would have an accurate record of every transaction.
Sports betting winnings are subject to the same 24% federal tax rate as other gambling winnings.
The winners are also responsible for paying the applicable local taxes.
The current NJ tax rate is 8.5% for retail sportsbook wins and 13% for wins at online sportsbooks or on mobile apps.
Whether or not the place where the winning occurs reports it to the IRS, keep in mind, these winnings are taxable income. Therefore, it is a gambler’s responsibility to report them and pay any associated taxes.
As with any type of gambling winnings, if you itemize your deductions on your tax return, you can deduct your documentable losses. However, your reported losses cannot exceed your reported winnings.
Taxpaying rules for professional gamblers
If gambling is the way you earn your living, different rules and guidelines apply in determining your tax liability.
So, if you are a professional poker player, blackjack player or sports bettor, proceeds from gambling are considered regular earned income from self-employment and taxed accordingly.
When filing your tax return, you must complete Schedule C, not Schedule A.
Here, you would name gambling as your business and deduct any gambling losses and other gambling-related costs as business expenses.
For example, you can deduct the cost of travel to a gambling facility, including the expenses associated with attending out-of-town gambling seminars and conferences. Also, you can deduct the costs for tournaments and handicapping contests.
You can also deduct the fees you paid for professional services, part of your internet bill and the cost of any materials purchased to help make you a better gambler.
Accurate record-keeping for all gamblers is a must
Regardless of the type of gambling and whether it is a profession or recreational activity, there are benefits to keeping a betting diary.
Every time you gamble, record the date, place, type of bets made, and amount won or lost. This information will help you identify the types of situations that are the most profitable for you as well as others you should avoid.
Also, if you are over-betting your bankroll and need to cut down, your records will show you that as well.
Furthermore, no one wins 100% of the time.
If you have reportable gambling winnings, you may be able to reduce your tax liability if you show that you have incurred significant losses.
Besides a gambling diary, other types of acceptable documentation include:
- Betting tickets
- Win-loss statements from gambling establishments