Scratch-off tickets are appealing because you can find out instantly if you have won a prize. If you win less than $600, you may even be able to collect your prize before you leave the store where you purchased your winning ticket. Even with their ease of use, they provide real income to a winner that must be reported at tax time if the winnings are over $600.
The state is required to report lottery winnings, including scratch-off winnings, as income to the IRS if you win over $600. IRS Form W-2G will be used to report these winnings.
Lottery Winnings are Taxable Income
In general, all sources of income -- no matter how small -- must be claimed on your tax return. All sources of income are subject to federal and state income tax, unless they are specifically exempt by law. This includes all gambling winnings, whether or not you receive a W-2G. Lottery prize winnings -- including those from scratch-off tickets -- are considered gambling winnings and must be included as income on your tax returns.
Tax Withholding Requirements
Federal income taxes of 24 percent are withheld from all cash prizes over $5,000. States have their own income tax withholding laws as well. For example, Illinois withholds 5 percent income tax from all prizes over $1,000. Winnings less than $5,000 - but more than $600 - will also be subject to federal tax withholding of 24 percent if the winner does not provide a Social Security number to the payer when claiming the prize.
Form W-2G for Gambling WInnings
For most prizes over $600, a W-2G - for certain gambling winnings - will be issued showing the amount of your winnings and the amount of tax, if any, that was withheld. Even if you do not receive a Form W-2G, you will still need to report the amount of your prize on your federal and state tax returns. Your actual tax liability may be more or less than the amount withheld depending on your overall tax situation.
Deducting Gambling Losses
If you itemize your deductions on Schedule A, you may also deduct the amount you paid for that winning lottery ticket as a gambling loss, as well as what you paid for any other winning and non-winning tickets during the year. For this reason, keeping track of money spent on lotteries and related gambling activities is a good idea. Keep in mind gambling losses can only be deducted up to the amount of gambling winnings.