Is Lottery Prize Money Subject to Game Tax?
Those who dream of winning the lottery, or simply purchasing one ticket, know they are taking a risk. While odds may seem slim, there’s always the possibility that you could strike it rich – and when that time comes, any prize winnings or gambling winnings must be reported and taxed like any other income source – including those won at lottery draws, slot machines, horse races or casinos. Should your luck turn and you do come away a winner then it would be prudent to consult both financial planners and tax specialists in order to minimize taxes upon winning large sums of money.
Your tax liability on your jackpot prize depends on the states in which you reside and purchase a ticket. When purchasing from multiple states at once, tax is withheld at a rate based on where the ticket was bought – for this to work properly you’ll need to complete and submit a W-9 form and provide your social security number so the appropriate taxes withheld from it.
Keep all receipts related to your winnings, such as tickets, canceled checks and credit card charges. The IRS needs all this information in order to assess how much tax should be withheld from prizes won. Regardless of how you collect or take out winnings from an event, be sure to keep records just in case they audit you!
Your jackpot size will dictate whether to take a lump sum or an annuity payment option. While taking the former allows more control of your cash and can allow for higher-yield investments, taking it this way also may mean having to pay higher tax bills the year in which it arrives.
Note that your tax burden for lottery winnings depends on whether or not you declare them as regular income. If you’re an employee, wages should be reported and payroll taxes paid on them; for self-employed or sole proprietors filing Schedule C with their tax returns should also be filed; furthermore, self-employment taxes will likely need to be paid as well.
When winning big jackpots, federal taxes typically top out at 37%; state and local rates may differ and be even higher. To protect yourself from being thrust into a higher tax bracket, spread out your winnings over 30 years as best you can; also consider making charitable donations which may decrease overall tax liability.
An annuity provides payments on winnings over time, making it ideal for saving for retirement or long-term goals while being subject to income tax in each year that it arrives. Each payment received will count toward your taxable income for that year.
