Whether you win the multi-million dollar lottery jackpot or just have some modest scratch-off ticket winnings, the amount of tax you'll pay on lottery prizes will depend on a number of factors, most notably, the amount of the prize, how much you spent on those not-so-lucky lottery tickets during the year and the amount of your other income.
Taxable Lottery Prizes
You may not always end up paying tax on your gambling and lottery winnings, but you'll never know until your report it on your tax return – which the IRS requires. Because the federal government imposes progressive tax rates – meaning different parts of your income are taxed at varying rates – the amount you'll owe on a lottery prize may be different from what another person may pay for the same prize. Ultimately, it's the tax rate for the highest tax bracket you're subject to that dictates how much you'll have to pay.
For example, suppose you file as single person during the 2017 tax year when the 10 percent tax bracket applies to your first $9,325 of income, with amounts more than $9,326 up to $37,950 being subject to the 15 percent bracket. Therefore, if your taxable income, not including a $10,000 lottery prize, would be $9,326 – your lottery winnings would be taxed in the 15 percent bracket. In other words, you'll owe $1,500 in tax.
Receiving a W-2G
State lottery agencies may have to report your winnings to the Internal Revenue Service on Form W-2G and withhold 25 percent for income taxes if you win more than $5,000. Like with the W-2 you receive from an employer, you'll need to attach a copy of the W-2G to your Form 1040 tax return. However, state lottery agencies will only send you a W-2G if the prize is $600 or more and is at least 300 times the wager you placed. Therefore, if your prize is $600, you'll only receive a W-2G if the ticket cost you $2 or less. Regardless of whether the amount of your lottery prize requires a W-2G form, you still must report all winnings for taxes purposes.
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Deducting Gambling Losses
To reduce the income tax on your lottery winnings, the IRS allows a deduction for your annual gambling losses. To take advantage of this, you have to itemize on Schedule A. You report gambling losses as a miscellaneous expense, which isn't subject to the 2 percent adjusted gross income reduction. If your losses exceed your lottery winnings, the maximum deduction you can take is equal to the lottery and other winnings reported on your tax return. For example, if you spent $1,000 on lottery tickets during the year and only won $600, you can take a $600 gambling-loss deduction to avoid all tax on the winnings, but the excess $400 in losses are nondeductible.
Tracking Yearly Losses
Because the IRS may ask for proof of the lottery and other gambling losses deducted on your return, it's a good idea to keep accurate records of your annual lottery and other gambling wagers and winnings. For the lottery, the best way to prove your losses to the IRS, if necessary, is to have all of your losing tickets available.
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