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The basics of how Michigan taxes lottery winnings

Winning the lottery can be an amazing stroke of luck. You can pay off your debts and indulge yourself and your loved ones. Unfortunately for some people, winning the lottery can result in tax issues. If you have won a lottery prize, that income is subject to federal, state and local income taxes.

In some cases, those who win money can find themselves in legal trouble if they fail to claim the income from lottery winnings on their tax return. If you regularly play the lottery in Michigan, you should take a moment to familiarize yourself with the tax rules for lottery earnings.

The Lottery withholds taxes on big prizes

In order to help ensure taxes get paid on lottery earnings, the Michigan Lottery automatically withholds taxes on prizes of more than $5,000. The Michigan Lottery estimates federal taxes at 25 percent, while Michigan withholdings are another 4.5 percent of the total prize.

It's important to note that those amounts are only estimates. Michigan Lottery encourages all winners to reach out to tax professionals, as well as the state and the IRS, to ensure the reserves will be sufficient to cover tax liability.

Smaller amounts can cause big issues

If you regularly play scratch-off lottery games or other lottery games with smaller prize amounts, you can easily accrue substantial tax liability. Remember that the Michigan Lottery only withholds taxes on prizes of $5,000 or more.

That means that all amounts smaller than $5,000, while subject to taxes, are the sole responsibility of the winner. You should be retaining a portion of each prize to help ensure you can meet your tax obligations. Failing to pay taxes on these amounts could result in an audit or even allegations of tax fraud.

Michigan Lottery often provides tax forms

In most cases, you will receive the right form for including with your taxes when you file. You will receive a form W-2G with any prize of more than $600 at the time you collect the prize. The Lottery offices will also take your information before dispensing your prize amount.

You should retain those forms until you file taxes. At that time, you or your tax professional will use the W-2G to fill out the 1040ES to accurately report your lottery earnings. Lottery earnings will get reported to the IRS and State Treasury, and they will expect that you pay your taxes for those earnings.

When in doubt, seek professional advice

If you feel concerned about the tax implications of your recent lottery winnings, take time to speak with professionals who can advise you on the topic. Tax laws and requirements are complicated and fast-changing. Professional advice and guidance can make all the difference.

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