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Texas imposes no state income tax on lottery winnings, placing it among nine states with that tax treatment, according to Quartz. Federal taxes still apply, with 24% withheld on lottery prizes over $5,000.
Federal withholding can fall short of the final bill
Lottery prizes are generally treated as ordinary income for federal tax purposes. The amount withheld when a prize is claimed is only part of the tax calculation.
Large jackpots can push income into the top federal tax bracket of 37%, according to Quartz. That means a winner’s final federal liability can exceed the initial withholding. The amount owed depends on the winner’s tax calculation; the top marginal rate does not apply uniformly to every dollar of income.
Noncash prizes also carry a federal tax obligation, based on their fair-market value.
Where Texas fits among states without income tax
Quartz lists Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington state and Wyoming alongside Texas as states with no state income tax.
The absence of a state income tax is one way lottery winnings escape state taxation. A specific exemption is another: California exempts prizes from its own California Lottery from state income tax by statute.
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Source: As reported by Quartz.
