New Jersey Starts Collecting More Tax Upfront from Lottery Winners

John Reitmeyer | July 13, 2016 | Budget
Change in income-tax withholding rules could help state finances at least a little bit

NJ Lottery
A retooled income-tax withholding policy for lottery jackpots just went into effect at the beginning of the month in New Jersey that should help the state collect more money upfront from those winning big payouts.

The overall impact on New Jersey’s latest budget is expected to be modest, but every little bit helps for a state that has had trouble hitting its revenue projections in recent years.

The new withholding rates debuted on July 1 as the state started its new fiscal year. A 5 percent withholding rate now applies for payouts of more than $10,000 and up to $500,000, and an 8 percent rate for all jackpots worth more than $500,000. They replace the state’s standard 3 percent rate for lottery payouts.

The change in the withholding rates won’t alter how much money is collected by the state from lottery winnings here, but it will mean that more revenue is deposited into state coffers right away rather than when income taxes come due in April.

The reason the state can expect to collect more income-tax revenue during the current fiscal year by only changing the withholding rates stems from how the state’s July to June fiscal-year calendar lines up with the schedule for filing income-tax returns in April. Collecting a larger share of a jackpot upfront means there’s more money coming in during the immediate fiscal year rather than later on.

For example, the New Jersey Lottery announced yesterday that an attorney from Brooklyn won a $1 million jackpot after buying a scratch-off ticket at a gas station in Linden. Under the old withholding rules, the winner would have had 3 percent of his jackpot withheld by the state, or $30,000. He then would have had to pay off the balance of his income-tax liability in estimated payments or when filing tax returns in April.

Under the new rules, the state is collecting $80,000 from his jackpot right way and will take in the smaller remaining balance later on.

Gov. Chris Christie’s administration is counting on the change to help in some small way to keep the newly minted $34.5 billion state budget in balance through the end of June 2017.

In testimony before legislative budget committees in May, acting Treasurer Ford Scudder said if the change had been in place this year there would have been roughly $25 million more in the state’s coffers when it confronted a $1 billion shortfall projection just weeks before the fiscal year ended on June 30.

Judith Drucker, a New Jersey Lottery spokeswoman, said those who hit the jackpot should benefit too. Winners can face fines and interest penalties when they don’t get their income-tax payments exactly right. “It will assist players in comfortably meeting their tax liability so that they are not faced with a bill for which they did not plan appropriately,” she said.

Drucker stressed that income-tax rates haven’t changed, only how much of each payout is being withheld by the state. The federal withholding rate of 25 percent on payouts worth more than $5,000 is also unaffected by the state-policy change. She noted the new withholding rates will put New Jersey more in line with neighboring states that offer lotteries. New York’s withholding rate is 8.82 percent and Maryland’s is 8.75 percent. Washington, D.C., has a withholding rate of 8.5 percent, she said.

A spokesman for the state Department of Treasury said yesterday that the new rates were established in-house by the Division of Taxation without any bill needing to go through the Legislature.