Playing the lottery is almost as fun as actually winning the lottery. But even when you win, it can feel like you’ve still lost a bit after all those pesky taxes get taken out of it.
With that said, once you reach a certain age, you’re eligible for certain tax exemptions as opposed to the general population. So does that mean older people can withhold their taxes on lottery winnings?
Here’s everything you need to know about how lottery taxation works and how the rules affect people of all ages.
What Should I Know About Lottery Taxes?
The lottery is a general term that refers to many games of chance available in most U.S. states. You can visit a lottery retailer and get a scratch-off ticket for instant winnings or participate in the Mega Millions or Powerball multi-state lottery games to press your luck at some of the largest jackpots in history.
Either way, the grand prize you see might not exactly be what you get. You can usually redeem your prize at a lottery retailer for smaller prizes under $600. These winnings are not taxed. You are not usually taxed on lottery winnings up to $5,000 — though anything over $599 will require you to fill out a special claim form to get your dough.
So what happens if you win a giant jackpot? You can expect to pay taxes at a rate of about 24%. While that might not seem like much, remember that the lottery will also withhold money to pay for lottery overhead and commission for the lottery retailer. When all is said and done, expect your cash prize to be reduced by about 40%.
If you win a prize over $5,000, your cash is subject to federal and state income tax. However, depending on your tax bracket, you may end up paying a little more. We’ll talk about how you might be able to cut down on the cost of those taxes a little later on.
Seniors and Lottery Taxes
When you reach a certain age, or if you are disabled in certain ways, you might be eligible for tax relief. For instance, some states allow for property tax relief for elderly individuals or disabled citizens so that they don’t need to pay property tax (or only need to pay a percentage).
Additionally, elderly seniors on social security might not need to file certain taxes. If the only income you receive is Social Security, you often do not need to file a federal income tax return. With that said, you typically must file if you receive Social Security while earning at least $14,250 in non-exempt taxable income per year. For example, if you work a second job where you make that much yearly, you’ll need to file based on those earnings.
So if there are times when seniors can be exempt from tax filing, does this also apply to lottery winnings? Not necessarily. The IRS views lottery winnings as gambling income. This means that elderly individuals still need to pay taxes on lottery winnings the same way as everybody else as long as the prize money rises above that $5,000 threshold.
But some intricacies are involved in elderly individuals winning the lottery. Let’s address some other burning questions you might have.
Does Winning the Lottery Make You Ineligible for Medicare?
Medicare is a federal health insurance program for individuals over the age of 65 and people with disabilities. It helps with medical care, though it does not cover all medical expenses or the cost of most long-term care arrangements.
If you win the lottery, your Medicare benefits will not change. This is because there is no monthly income cap for Medicare, so you can continue to earn money even if you’re on it. You also wouldn’t need to pay back any expenses that Medicare already covered.
With that said, you might need to pay a higher monthly premium for Medicare Part B. Medicare Part B charges a standard monthly premium. However, if your modified adjusted gross income report on your tax returns puts you into a higher tax bracket, you’ll be responsible for paying a higher premium within the next two years.
This is called Income-Related Monthly Adjusted Amount, or IRMAA. Medicare uses your income for two years before figuring out how much you’ll owe on your monthly premiums.
How Can You Pay Fewer Taxes on Lottery Winnings?
Even though it might feel a bit unfair to pay taxes on your lottery winnings, even if you’re a senior, you might be able to save a little money down the road if you play your cards right.
Go for Annuity Payments
You’ll choose between a lump sum payment or an annuity payment when you win the Mega Millions jackpot or the Powerball jackpot. A lump sum payment immediately pays out your total aggregate prize value. So if you won $1 billion, after taxes and fees, you’d probably make out with $600 million right then and there.
On the other hand, annuity payments pay out your prize over time — usually yearly installments over 30 years. A significant benefit of this route is that it prevents you from spending all your money simultaneously. Of course, it’s always possible that you’ll die before seeing all your winnings.
But with annuity payments, you’ll probably pay fewer taxes when you file at the end of the year. This is because winning the lottery will likely throw you into a higher tax bracket. If you hit the jackpot, you’ll naturally be in the highest tax bracket and owe upwards of 37% in federal income tax at the end of the year.
When you take annuity payments, you might not reach that tax bracket until many years later. This means you’ll owe less overall income tax at the end of each year.
Again though, this is a highly personal decision. Remember that if you are a senior citizen who just won the lottery, it might make sense to take the lump sum to enjoy all of your winnings upfront.
Play in the Right States
Almost every state in the country participates in the lottery. Except for Alabama, Alaska, Arkansas, Hawaii, Mississippi, Nevada, Utah, and Wyoming — you can play the lottery in every state. As such, it’s important to consider state tax laws and federal tax rates when determining the total amount you’ll receive for winning tickets after tax liabilities.
Each state regulates its percentage of income tax which applies to lottery winnings. So if you get lottery tickets in certain states (and win), you’ll be able to avoid paying a high tax rate. States like North Dakota and Pennsylvania have the lowest top tax rates at just 2.9% and 3.07%, respectively.
Additionally, Delaware and California kindly do not tax lottery prizes at all. So if you win in one of these states, you’ll be able to keep a lot more cash compared to states like New Jersey and Oregon, which tax 10.75% and 9.9%, respectively.
Hire a Tax Professional
Hiring a financial advisor after winning the lottery is something you should do regardless of your financial literacy because it can help you navigate the treacherous turmoil of dealing with your newfound wealth. But a tax professional can also help you figure out advanced techniques for saving money on taxes even after such a significant win.
Over time, it can save taxpayers a lot of money on tax bills and alleviate concerns about federal withholdings, tax deductions, and other standard tax issues that cut into total income.
What Are Some Lottery Tax Considerations?
If you itemize, you can deduct gambling losses from your end-of-year tax report. Additionally, your gambling winnings cannot be more than whatever you lost to avoid this as taxable income.
Additionally, remember that whatever you do with your winnings will still be subject to taxation like any other purchase. You'll need to pay taxes if you spend your winnings on massive purchases. But if you choose to donate your money to charities, you can write these expenses off.
It’s also important to know that if you win the lottery, you’ll likely be inclined to share with your family and friends. You should share your wealth, but remember that you’ll be subject to gift taxes if your gesture is too costly. Typically, you’ll need to pay gift tax on any physical monetary gift over $15,000 per recipient. You can bypass this tax by paying for student loans or setting up a trust fund.
Finally, know that there is also no exemption from estate taxes after winning the lottery. The estate tax is a levy on your right to transfer property after your death. Depending on your assets, debts, or other expenses, estate tax returns can be higher. And since lottery winnings are usually substantial, estate taxes for lottery winners are often high.
In Conclusion
While seniors are exempt from certain types of taxes, like property or income taxes, under specific regulations, they cannot remain exempt from paying taxes on lottery winnings. This means that anyone, regardless of age, still needs to pay federal and state income tax.
The only exception is if you win your prize in a state that does not tax lottery winnings. Additionally, you can cut back on the damage by choosing annuity payments rather than a lump sum.
But if you win the lottery, money is the last thing you should stress about. Make managing, spending, and saving your money more fun with Yotta. We offer banking services that pay out interest in prizes — up to $1 million every day.
Get started today to see why over 500,000 users choose Yotta to make saving more fun.
.png)
