When you buy a lottery ticket, you're not the only one that hopes you win. If you hit a really big jackpot, you're going to have to pay a really big tax bill. While the Internal Revenue Service requires that 25 or 28 percent of lottery winnings be withheld for federal income tax, you'll owe even more if you win a lot of money.
Tax Withholding Requirements
According to the 2013 tax-year edition of Publication 505, the IRS requires lotteries to withhold taxes from winnings of more than $5,000. If you give the lottery your Social Security number so that it can report your identity and your winnings together, it will withhold 25 percent. The IRS requires lotteries to withhold 28 percent from the winnings of those who don't provide their Social Security numbers.
If you win $600 or more in a lottery, it is required file Form W-2G. This means that the IRS will know about your winnings and you'll have to pay taxes on them. However, if you win between $600 and $5,000, no taxes will be withheld, so you might need to save some money to pay your taxes.
What You Owe
Your withholding has nothing to do with what you owe. It's just an estimate. What you owe is based on your actual tax rate. The way the tax system works, the more you make, the more you pay. The brackets change every year, but assuming that you're single, in 2014 your first $9,075 of income is taxed at 10 percent. Income up to $36,900 is taxed at 15 percent, and anything between $36,900 and $89,350 gets taxed at 25 percent. The IRS also has 28, 33 and 35 percent brackets. On income over $406,750, you pay 39.6 percent tax.
What a Jackpot Costs
If you won a $200 million jackpot, you could owe millions in taxes. Assuming that you didn't make any money working and don't have any deductions, you can subtract the $6,200 standard deduction from your winnings for a total income of $199,993,800. Your first $406,750 of income gets hit with a total tax of $118,188.75. The remaining $199,587,050 gets taxed at 39.6 percent. Combining the $118,188.75 with the $79,036,471.80 gives you a total federal tax bill of $79,154,660.55. However, only $50 million would have been withheld, leaving you to write a check for $29,154,660.55.
- Brand X Pictures/Stockbyte/Getty Images