Withholding at the counter
Federal withholding is 24 percent on proceeds over $5,000, New York State takes 10.9 percent, and New York City residents another 3.876 percent. That is roughly 38.8 percent at the claim center.
The short answer
A further bill in April
Withholding is a prepayment, not your tax bill. The top federal rate is 37 percent, so a large prize leaves a further bill at filing.
NYC winners pass 51%
For a New York City winner the combined top rate passes 51 percent.
Where a New York lottery prize goes at the claim center
A NYC resident, on proceeds over $5,000
24 percent · Federal withholding
Flat and statutory. Not your rate.
10.9 percent · New York State
Withheld at the highest state rate.
3.876 percent · New York City
City residents only. Yonkers pays a surcharge instead.
61.224 percent · Received
Before the further federal bill at filing.
38.776 percent comes out at the counter. The combined top rate is above 51 percent, so a large prize leaves more to pay.
Withholding is roughly 38.8 percent for a New York City winner. The top combined rate is higher.
Why the counter check is not what you keep
Fixed withholding vs a return-based liability
So the check you receive at the claim center is not what you keep. The lottery withholds at fixed statutory rates. You calculate your actual liability on your return months later, and on a large prize the difference runs to six figures.
01Withholding rates
Withholding rates on a New York lottery prize: 24, 10.9 and 3.876 percent
Three layers come out at the claim center, and all three are fixed by statute rather than set by your income.
Federal, 24 percent.Required on proceeds over $5,000, where proceeds means the prize less the cost of the winning ticket. The lottery withholds 30 percent instead from a nonresident alien, meaning someone who is not a US citizen or resident for tax purposes.
New York State, 10.9 percent.Withheld by the New York State Gaming Commission, which runs the lottery, at the highest state rate with no allowance for deductions or exemptions.
New York City, 3.876 percent.For city residents, on top of the state rate. Yonkers residents pay a surcharge of 16.75 percent of their New York State tax instead, which on a prize withheld at 10.9 percent works out to about 1.83 percent of the prize. Everyone else in the state pays neither.
The same rates apply to NY Lotto, Powerball, Mega Millions, Take 5 and scratch-off prizes. New York State does not distinguish between them.
02Who pays
Who pays New York tax on a lottery prize
Three separate rules decide who taxes a New York Lottery prize, and residency only settles one of them.
New York State
Follows the ticket. A prize with proceeds over $5,000 is New York source income even for a non-resident, who files Form IT-203.
New York City
Follows residency. City residents only. A New Jersey winner pays none, and neither does a winner in Buffalo.
Your home state
Taxes it as well, usually with a credit for the New York tax. You rarely pay twice, but you do file twice.
Moving after the drawing does not undo any of it. New York sources and taxes the prize on the date it is won.
03Federal rate
The federal tax rate on lottery winnings is up to 37 percent
The federal tax rate on lottery winnings is your ordinary income rate, up to 37 percent. The 24 percent taken at the claim center is withholding, not the rate.
Worked example: a $1 million prize for a New York City resident
| Amount | |
|---|---|
| Prize | $1,000,000 |
| Less: federal withholding at 24 percent | ($240,000) |
| Less: New York State at 10.9 percent | ($109,000) |
| Less: New York City at 3.876 percent | ($38,760) |
| Received at the claim center | $612,240 |
| Amount | |
|---|---|
| Federal tax for a winner already in the top bracket | $370,000 |
| Less: federal withholding already taken | ($240,000) |
| Federal shortfall due at filing | $130,000 |
A winner with no other income owes less than $370,000, because the first $640,600 of taxable income is taxed at lower rates. A winner with a salary on top owes the full amount.
Withheld against owed on a $1 million prize
For a winner already in the top bracket.
Withheld
24 percent, flat
$240,000
Owed
37 percent, top bracket
$370,000
Federal withholding is 24 percent. The top federal rate is 37 percent. Nobody sets aside the difference.
Most lottery winners who run into difficulty do the same thing. They treat the check as net, spend accordingly, and owe the balance the following April.
04Underpayment penalty
How to avoid an underpayment penalty
Withholding alone rarely covers a large prize, and you owe a penalty on the shortfall unless you meet one of two safe harbors. An underpayment penalty is a charge for not paying enough tax during the year, not just by the filing date.
| Safe harbor 1 | Safe harbor 2 | |
|---|---|---|
| Pay at least | 90 percent of this year's tax | 100 percent of last year's tax |
| If prior year AGI was over $150,000 | No change | 110 percent of last year's tax |
| Easier after a windfall | No, it needs the jackpot year figure | Yes, last year was an ordinary year |
Meet either one and no underpayment penalty applies. Miss both and it does.
The second is usually the easier route. If last year was an ordinary year, that figure is small, and covering it costs far less than covering 90 percent of a jackpot year.
Pay it as soon as you receive the money rather than waiting for April. The penalty accrues daily, so delay adds to it.
05Group wins
Group wins and Form 5754
If several people bought the ticket, file Form 5754 before anyone claims. The lottery then issues a separate Form W-2G to each member for their own share, and each person is taxed on their own share.
Without it, one person claims the whole prize, is taxed on the whole prize, and every payment out to the others is a gift from them. Above the annual exclusion it reduces their lifetime exemption and needs a gift tax return.
The $5,000 test also applies to the whole group’s prize, not to each share.
06Debts
Debts deducted from a prize before payout
Some debts attach to a lottery prize before it reaches you.
Federal tax debt.The IRS can levy the prize at the lottery, ahead of payment.
New York State tax debt,through the state's offset program, which diverts payments to settle what is owed.
Child support arrears.New York matches lottery claims against its arrears database.
If any of these apply, deal with them before you claim.
07Before you claim
What to do before you claim
Four decisions, and three of them cannot be undone once you have claimed.
Do not spend against the gross
Work from a net figure you have calculated.Check whether an estimated payment is due
Withholding alone may not protect you from an underpayment penalty on a large prize.Decide lump sum or annuity
It changes which years the income falls in, and the choice is generally irreversible.Document a group win
File Form 5754 before anyone claims, so each member is taxed on their own share.
You will receive a Form W-2G reporting the win. The lottery sends a copy to the IRS, so they already have it.
08Prize size
Lottery tax by prize size: $1,000, $5,000 and $1 million
Prize size changes what happens at the counter, and each page below works through one of them.
- Tax on a $1,000 lottery ticket. Below the withholding threshold, so you receive the full amount and owe the tax later.
- Tax on a $5,000 lottery ticket. A prize of exactly $5,000 is treated differently from a dollar either side of it.
- A $1 million prize after taxes in New York. Where the withholding gap becomes a six figure bill.
- The New York lottery tax calculator. Run the arithmetic on your own number.
09FAQ
Frequently asked questions
How much tax do you pay on lottery winnings in New York?
Federal tax up to 37 percent, New York State up to 10.9 percent, and New York City up to 3.876 percent for city residents. Withholding at the counter is 24, 10.9 and 3.876 percent, so a large prize leaves a further bill at filing.
Is anyone exempt from tax on lottery winnings?
No. Lottery winnings are ordinary income for every US citizen and resident, whatever the amount. Nonresident aliens are not exempt either, and face 30 percent federal withholding instead of 24 percent.
Do I pay New York tax if I live in another state?
On a New York Lottery prize with proceeds over $5,000, yes. You file Form IT-203 and pay New York State tax, though not New York City tax. Your own state usually gives a credit for it.
Can I reduce the tax by giving some of the prize away?
Not by splitting it after the draw. That is a gift from you, not a win by them. A charitable donation is deductible if you itemize, within the annual limits for cash gifts.
Does the lottery tell the IRS?
Yes. You receive a Form W-2G and the IRS receives a copy, so the income is on record before you file.
What if I win in December and claim in January?
The income falls in the year you claim, not the year of the drawing. On a prize near a year end, the timing is worth advice.
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Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising New York taxpayers on windfall income and estimated tax. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.