Lottery Winnings The Tax Implications

Hi and welcome back to the tax implications podcast.

I’m Sam Hicks, I’m a CPA and tax advisor and

This is your short form podcast covering the items that affect your bottom line

Thank you for tuning in. Today I’ll be discussing lottery winnings

There are several tax considerations, as well as important nontax considerations, that you should take into account.

How lottery winnings are taxed. You should be aware that lottery winnings are taxable at the federal level, some states don’t tax winnings. This is the case for cash winnings and for the fair market value of any noncash prizes you may win, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. Your lottery winnings may also be subject to state income tax. Thus, depending on where you live, your total tax bill could be as high as 50%, or more. You don't get any capital gains rate break for lottery winnings. Nor is there any income averaging to help lower your tax bill.

On the other hand, you are entitled to a tax deduction for any gambling losses you had. These are taken as an itemized deduction but cannot exceed your winnings. If your lottery winnings are payable in annual installments, the installments you receive in future years are still gambling winnings, making losses in those future years deductible to the extent of the installments, even if you have no other gambling winnings in those years. Gambling losses aren't subject to the pre-2018/post-2025 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions (miscellaneous itemized deductions are suspended for tax years 2018-2025), nor are they subject to the pre-2018/post-2025 overall limitation on itemized deductions (also suspended for tax years 2018-2025).

To establish your entitlement to a deduction for gambling losses, you should keep documentary evidence of the costs of your wagers—both the cost of your lottery tickets and of any other wagering you do, such as betting on races, casino games, etc. The evidence should consist of receipts for tickets, wagers, cancelled checks, credit card charges, losing tickets, etc. Make sure you do this for all the years in which you're receiving installment payments of your lottery winnings. In some cases, taxpayer estimates have been allowed, but you shouldn't rely on this. Documentary evidence is preferable by far.

Shared ownership of winning lottery ticket. If you are sharing the prize on a winning lottery ticket (for example, with members of your family, or friends), you may still wind up paying tax on the entire amount, depending on the sharing arrangement. The key is to establish that the ticket was owned by multiple persons—you and the persons with whom you are sharing the prize—before the ticket was declared to be a winner. If you can do this, then you and the other co-owners of the ticket each report only your individual shares as income.

You should consult with experienced tax and legal professionals before making any decisions for your business.

Thank you for listening.

If you have any questions that you’d like discussed on a future episode please contact me at Sam@taximplicationspodcast.com.