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How Does a Lottery Winner Determine Taxes?
Monday, January 05, 2009
InstructionsLottery winnings are taxableStep 1: Whenever the Powerball or other lotteries are pushing record dollar payoffs, people buy tickets in droves. Although the chances of winning the lottery are infinitesimal, it doesn't stop thousands of people from buying tickets and a handful of people from winning. When one wins the lottery, the gigantic number displayed as the grand prize will never be the actual amount received by the winner. Lottery winnings are subject to federal income tax, and considering the size of most lottery winnings, the federal tax is usually pushed to the maximum level, at around 40 percent of the winnings. In addition to federal taxes, states may require additional taxes on lottery winnings, which can push the tax over 50 percent in some cases. While the amount remaining after taxes is still a sum that most individuals would never be able to attain otherwise, lottery winners often attempt to find ways to lessen or evade taxes. To determine the exact tax rate for lottery winnings, one must find out what the tax rate for lottery winnings in their state is and add that number to the federal tax rate appropriate for their income level, factoring in the lottery winnings.
Gambling losses are an itemized deductionStep 1: One factor that can reduce the amount of taxes owed that applies directly to the lottery and other types of gambling is that losses can be written off on taxes as an itemized deduction. Of course, the amount deducted for taxes cannot be greater than the amount of winnings, but for lottery winners, winnings are almost guaranteed to exceed losses by a large amount. Whatever money the winner spent buying tickets, as well as gambling in other ways, can be deducted from taxes. Given that most people who play and win the lottery have low income, however, they do not stand to gain much from deducting their gambling losses. (People don't usually buy thousands of dollars worth of lottery tickets.) This law is primarily beneficial to those who spend large sums of money betting and gambling in casinos.
Non-cash prizes are also taxedStep 1: While a traditional lottery involves paying money for a ticket in order to win a large lump sum of cash, other types of lotteries or raffles may involve winning a non-cash prize, such as a car, a trip or real estate. Even lotteries involving non-cash prizes are taxable by the federal government up to the value of the items being given away. So if, for instance, someone wins a brand new car worth $20,000 in a small lottery, he must pay the federal government and the state government taxes $20,000 worth of additional income on his tax return. The drawback with non-cash prizes is that the winner cannot pay the tax incurred out of his winnings, meaning the tax must be covered with other earnings, effectively reducing the actual amount of money the person is able to spend. Therefore, if a person does not really want an item he wins, it is sometimes best to sell it, or not even accept the prize at all. (Oftentimes vacation packages are not worth accepting, as they aren't easily transferred or sold.)
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