Simple Texas Lottery Tax Explainer

After winning a big lottery prize, like the Powerball jackpot, taxes would probably be the farthest thing from your mind. Still, there are some very important questions that will need to be answered. How much of your prize will be taxed? Does the size of the prize make a difference in how much you pay? Is it better to take a lump sum cash payment or the annuity option? Do non-US citizens need to pay taxes on lottery winnings? Keep reading for a simple explainer on everything you need to know about Texas lottery tax!

How are lottery taxes calculated?

Lottery prizes are advertised before taxes are deducted and several factors go into how much of your prize will go towards taxes, including the prize amount, your tax bracket, if you receive your winnings as a lump sum or annual payments, and where you live and won the prize.

Does Texas have state income tax on lottery winnings?

Luckily for Texans, the Lone Star State is one of the few that does not tax your lottery winnings! However, this doesn't mean you’ll be walking away with 100% of your prize. All US citizens are subject to federal income tax on their lottery winnings.

How much of the prize goes to federal taxes on lottery winnings?

Lottery winnings are considered taxable income for federal tax purposes and your winnings are taxed the same as your wages or salary. Most prize winners pay a fixed federal income tax rate of 24% on their lottery winnings over $5,000.

Federal prize withholdings are calculated on the amount of prize winnings, minus the ticket cost. For example, a prize of $5,000 that was won from a $2 lottery ticket will not be taxed, as the amount does not meet the $5,000 threshold.

Do non-US citizens need to pay Texas lottery taxes?

Yes. Any winner who is not a citizen or resident of the United States will be subject to a federal tax withholding rate of 30% on prizes exceeding $600 or more.

However, if a non-US citizen meets the Green Card test or the Substantial Presence test, the same reporting and withholding requirements of a U.S. citizen will apply to their lottery winnings.

For more information, see the IRS U.S. Tax Guide for Aliens.

Cash value option or annual payments

When winning a big lottery prize, you will have two options for receiving your prize money: lump sum (a one-time cash value payment) and annuity (annual instalments).

So how do these options work?

Lump sum

This option will award you the entire prize amount as a one-time cash payment.

The tax owed on your prize money will be calculated as it stands at the time of winning. After paying taxes on this amount, you are free to spend or invest as you choose.

Some of the advantages of receiving your winnings in one go are the ability to invest a large part of your prize in real estate or stocks to potentially grow it faster, make big purchases, and possibly avoid long-term taxes.

The disadvantages?

While there aren’t many disadvantages to receiving your lottery prize as a lump sum amount, it could move you into a higher income tax bracket for the year, meaning your tax rate could triple.

Annuity

Big spender? Annual installments might be the right payout option for you thanks to the steady, long-term stream of income it provides. In other words, you won’t be able to spend all of your winnings at once.

Unlike a lump sum payout where you take a big hit by paying federal taxes upfront, the annuity option allows you to spread out your taxes over a longer period of time and most probably come closer to taking home the advertised jackpot amount.

The state lottery invests your winnings in various government securities, and with each payment the winner will also receive any interest earned. Every installment is charged at the current tax rate, meaning a potentially lower tax rate on your annual installment.

If you become one of Texas's biggest lottery winners and win a really big prize, you may be bumped to the top tax bracket (if you weren't already), increasing your tax rate to 37%. However, if you decide to take your prize in 30 annual payments, you may not be in the highest tax bracket each year, depending on the size of your prize and your other income.

Do keep in mind that when playing the Texas Lottery you must choose between the cash value option and annual payments when you purchase your ticket and cannot change your choice after the fact. At theLotter Texas, all tickets are for the cash value option.

How will you be taxed if you win in a lottery pool?

Lottery pools are a great way to save some money by splitting the cost of multiple lottery tickets. The only potential downside is that your prize will be smaller as you're sharing it with the other members of your pool and you're still subject to the income tax rate for the bracket your portion of the winnings places you into.

If you decide to claim the prize on behalf of everyone in your pool, make sure to protect yourself by documenting that the entire prize isn’t entirely yours. The IRS could assume that you’re giving the money away as a gift, resulting in more taxes. You might also be responsible for income tax withholding on the entire winnings if you claim the money as the sole winner.

How do you prevent this? Have everyone in your lottery pool sign a written contract defining their shares. This contract can then be handed over to the IRS if necessary.

Filing tax returns on lottery winnings

While most players see money won from the lottery as a prize, the IRS views your newfound wealth as taxable income. There are two forms that may need need to fill out to report your lottery winnings.

Form 1040

The full amount of your winnings for the past year must be reported on line 21 under “Other Income”. If you’re itemizing deductions, you can deduct your losses for the year on line 27, Schedule A. This form must be filled out regardless of the size of your prize.

Form W2-G

If you win over $600, you will receive a W2-G for reporting your winnings from the past year, the date(s) you won the lottery, and the federal and state income taxes withheld under “Federal income tax withheld from Forms W-2 and 1099”. The deadline for filing this form is March 31.

Now you're ready to play!

This guide is a handy reference for the most important questions regarding taxes on lottery winnings. If you do actually win a big lottery prize, make sure to consult a tax professional. For information on what else happens after winning a big lottery prize, read our guide that covers subjects like how to claim your lottery prize.

With all those facts and figures out of the way, now's the time to purchase lottery tickets online from theLotter Texas!