Maryland Lottery Taxes: How Winnings Are Taxed
Understand the financial journey after a lottery win. This guide clarifies how Maryland winnings are treated as income and the responsibilities that follow.
Lottery winnings are a form of taxable income in the United States, subject to both federal and Maryland state taxes. This tax liability applies to a wide range of winnings, not just major jackpots. The amount of tax owed and the process for payment depend on the value of the prize and the winner’s residency status.
Immediate Tax Withholding at the Time of Claim
Upon claiming a significant lottery prize in Maryland, winners will not receive the full advertised amount due to automatic tax withholding. For any prize exceeding $5,000, the Maryland Lottery is required to withhold a portion for federal and state income taxes before distributing the funds. The mandatory federal withholding rate is a flat 24% on winnings over this $5,000 threshold.
In addition to federal withholding, Maryland applies its own state-level withholding. For Maryland residents, the state withholding rate on lottery winnings is 9.5%, while for non-residents who win in Maryland, the rate is 8.75%. These withheld amounts are prepayments toward the winner’s total tax liability for the year. The final amount of tax owed is calculated when filing annual income tax returns.
Understanding Your W-2G Tax Form
The Maryland Lottery and Gaming Control Agency issues IRS Form W-2G, “Certain Gambling Winnings,” for any single prize valued at $600 or more. This form is sent to both the winner and the Internal Revenue Service (IRS), serving as the official record of the winnings and any taxes withheld.
The Form W-2G contains several pieces of information necessary for tax filing. Box 1, labeled “Gross winnings,” shows the total amount of the prize before any deductions. Box 2, “Federal income tax withheld,” details the amount sent to the IRS for prizes over $5,000. Similarly, Box 16, “State income tax withheld,” reports the amount withheld for Maryland taxes.
Annual Income Tax Filing Requirements
When filing annual taxes, the information from Form W-2G must be reported on federal and state returns. For federal purposes, the gross winnings from Box 1 of the W-2G are reported on Schedule 1 of Form 1040 as “Other Income.” The federal taxes withheld, shown in Box 2, are then applied as a credit against the total federal tax liability.
Maryland residents must report their lottery winnings on the Maryland Resident Income Tax Return, Form 502. The winnings increase the filer’s Maryland adjusted gross income, and the state tax withheld is claimed as a payment against the state tax liability. The final tax amount is determined by the winner’s total income, which places them into one of Maryland’s tax brackets, ranging from 2% to 5.75%. Maryland’s local county income taxes, which range from 2.25% to 3.2%, also apply to lottery winnings.
Non-residents who win the Maryland lottery must file a Maryland Non-Resident Income Tax Return, Form 505, to report the prize. They pay Maryland income tax on the winnings and claim the amount withheld as a credit. To prevent being taxed twice on the same income, non-residents may be able to claim a tax credit on their home state’s return for the taxes paid to Maryland.