If you've recently won the lottery in Kentucky, you may be wondering about the lottery tax rate. You may be aware that states tax lottery winnings heavily and have severe penalties for trying to avoid these fees. However, what is the exact amount? Does it vary depending on how much you win? And how do you go about paying those taxes?
Kentucky Tax on Lottery Winnings
Kentucky imposes a 6 percent tax rate on all lottery winnings. That may not sound like a lot, but it adds up very quickly. Recently, the Mega Millions hit a whopping $1 billion. If you held the winning ticket for that drawing, you would have paid $60 million right off the top to the state of Kentucky alone.
What's more, that amount is much higher than many other states – 18 states tax lottery winnings at a rate under 4 percent. There are eight states that don't tax lottery winnings directly at all, however, which includes Alabama, Alaska, California, Delaware, Hawaii, Mississippi, Nevada and Utah (of these, only California and Delaware have their own state lotteries).
Kentucky is certainly not the highest, though – 12 states tax lottery winnings at a rate higher than 6 percent. The highest is New York, at 8.82 percent, followed by Maryland at 8.75 percent. Five states tax at the same or at a similar rate as Kentucky, including Georgia, New Mexico, North Carolina, Rhode Island and Vermont.
Federal Lottery Tax Calculator
If you think Kentucky charges a high tax for lottery winnings, you need to brace yourself. Kentucky pales in comparison to the federal lottery tax rate, which is an astounding 25 percent on all winnings over $5,000.
That means that on a $20 million ticket, you'd pay $5 million to the federal government and an additional $1.2 million to the state of Kentucky. On a $1 billion Kentucky cash ball payout, you'll pay $60 million to Kentucky and $250 million to the federal government.
Where to Pay Your Lottery Taxes
The answer to the question of where to pay your lottery taxes is simple, although it isn't immediately obvious. You pay lottery taxes in the state where you bought the ticket – which is not necessarily the state in which you live (although additional taxes may apply). This is important to know because, depending on where in Kentucky you live, it might behoove you to go to a nearby state to buy your ticket.
States that border Kentucky that have lower state lottery taxes are Tennessee (0 percent), Indiana (3.23 percent), Missouri (4 percent), Ohio (4 percent), Virginia (4 percent) and Illinois (4.95 percent). This may not seem like a lot, but even 1 percent on your winnings can be a significant amount.
Most lotteries make it very simple to pay the federal tax on your winnings. They simply withhold it from your payout, so you'll never even see that money. Finally, bear in mind that you may owe income taxes on top of the lottery taxes in the state in which you reside. If you've won big in the lottery, it's wise to consult a tax attorney.