With this PowerBall madness reaching an all-time high questions on taxes are also bubbling to the surface. Everyone knows that winners choose between a lump sum payment and installment payments but few know that where you purchase your ticket also matters. This is due to state income and withholding taxes.
Similar to a wage income some of the lottery winnings are withheld for the government before you calculate your total tax bill when filing your income tax the next year. Lottery winnings $600 or less are not reported to the IRS; however winnings over $5000 are subject to a 25% federal withholding tax. Hence if someone wins the 1.5 billion dollars $375 million goes straight to the IRS. Then the following April the winner will see if any of that amount gets refunded or if they owe more.
Similar to the national level lottery winnings are subject to state income tax. However state taxes vary.
Since we are located in Louisville Kentucky we are going to look at the taxes for Indiana and Kentucky.
In Indiana the withholding tax rate is 3.40%.
However if you win any prize money from the Indiana Hoosier Lottery Commission by winning:
- An instant game; or
- An on-line game such as Hoosier Lotto Powerball Mega-Millions etc. you may be eligible for a deduction.
Indiana has an exemption of $1200 per W-2G meaning $1200 of the winnings from each W-2G are exempt from tax. Thus if someone wins two W-2Gs then the exemption amount would be $2400 (2 X $1200).
Winnings from other state lotteries Indiana pari-mutuel horse races or out-of-state tracks Indiana or out-of-state riverboats and other gambling winnings are fully taxable in Indiana and should not be deducted from your taxable income.
In Kentucky the withholding tax rate is 6%.
Kentucky does not have an exception.
If you have any questions about taxes you may set up an appointment. Good luck!
U.S. Census Bureau Tax Foundation calculations.