Tax Withholding on Lottery Winnings -- What Rate?

[BobKamman]

Does your state have a lottery? If so, at what rate does it withhold federal tax on major prizes?

Internal Revenue Code Section 3404 says:

(q)Extension of withholding to certain gambling winnings
(1)General rule
Every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold from such payment a tax in an amount equal to the product of the third lowest rate of tax applicable under section 1(c) and such payment.

So what is the third lowest tax rate under Section 1( c)? When I look at it, I see the three lowest rates for years 2018 through 2025 are 10%, 12% and 22%.

Yet IRS in its instructions to Form W-2G tells lotteries to withhold at 24%, and that’s what they do here in Arizona. I checked California, and that’s their rate also.

Am I missing something? Or is this just another case of “when IRS says jump, we just ask how high” ?

[IRonMaN]

When I win the lottery, I'll get back to you on that rate.

Hold on a second, you actually have to buy a ticket to win, don't you?  I guess I won't be getting back to you.

[BobKamman]

I found this in the small print of Section 3404, apparently added with the law otherwise known as TCJA:

(F)References to rate tables

Any reference in this title to a rate of tax under subsection (c) shall be treated as a reference to the corresponding rate bracket under subparagraph (C) of this paragraph, except that the reference in section 3402(q)(1) to the third lowest rate of tax applicable under subsection (c) shall be treated as a reference to the fourth lowest rate of tax under subparagraph (C).

[qbteachmt]

Our State tax rate changed for 2022 from 6.9% to 6.75%. This is what the lottery website shows:

• How much in taxes is withheld from each Lottery prize?

  We are required by law to withhold both state and federal taxes on certain levels of Lottery prizes.

  For U.S. citizens furnishing Social Security Numbers, we are required to withhold 6.9% for Montana state tax and 24% for federal tax from any prize greater than $5,000.

  However, there are other situations where the typical withholding requirements differ. Here's the law:

  We are always required to withhold 6.9% state tax on all prizes greater than $5,000.

  We are required to withhold 24% federal tax on any prize $600 and over for U.S. citizens who don't furnish Social Security Numbers or tax identification numbers.

  For non–residents of the U.S., we must withhold 30% federal tax on any prize $600 and over.

  At the end of the year, we mail each winner who has won $600 and over a W-2G form to use when filing his or her taxes.

[PATAX]

@BobKamman doing return now with $10,000 pa lottery winning, 24% federal income tax withheld.