Winning the lottery and paying income taxes on it is always better than not winning the lottery at all. However, there are write-offs available to reduce the tax you will owe on winnings if you maintain accurate records of the lottery losses you incur during the year. However, just because you report lottery winnings in gross income doesn’t necessarily mean you can claim these write-offs; there are some requirements you must satisfy first.
Lottery Winner Taxation
The Internal Revenue Code is very clear on the tax implications of gambling winnings, which includes your lottery winnings. You have an unconditional obligation to include all winnings in your gross income in the year you become a lottery winner. When you report your lottery winnings, you must report the gross amount, meaning that you don’t reduce it for the cost of all losing lottery ticket purchases you make during the same year. If eligible to deduct your lottery losses, you must do so in a separate section of your tax return.
You can never use your lottery losses to reduce the tax you owe on other forms of income, such as your employment earnings, interest from bank accounts or alimony payments. The maximum deduction the IRS allows is equal to the lottery winnings you report in the same year. For example, if you spend $1,000 on lottery tickets during the year and only win $400, the maximum deduction you can claim is $400. The remaining $600 is nondeductible and you cannot forward it to future tax years.
Records of Losses
If you ever choose to deduct your losses, the IRS requires that you maintain a diary during the year to record every lottery transaction, regardless of the outcome. Therefore, it’s beneficial to write down every time you purchase lottery tickets with the total cost and gross winnings. In addition, the IRS requires you to retain some proof of your lottery expenditures. And although it doesn’t want you to send the proof with your tax return, not having them readily available in the event the IRS audits you can cause you to lose the deduction. Maintaining documentary proof of your lottery expenditures is as simple as keeping a file of all losing lottery tickets and the receipts you obtain when cashing in your winnings.
The write-off for your lottery losses is only available if you elect to itemize your deductions instead of claiming the standard deduction. You report the total of your lottery ticket purchases as a miscellaneous expense on Schedule A. However, when preparing your Schedule A, it’s important that you include the losses in “other miscellaneous expenses” since the 2 percent adjusted gross income limitation that applies to other types of miscellaneous expenses, such as job-related costs, doesn’t apply to your lottery losses.
- IRS.gov: Publication 525 - Taxable and Nontaxable Income
- IRS.gov: Publication 529 – Miscellaneous Deductions
- Powerball. "About." Accessed April 1, 2020.
- North American Association of State and Provincial Lotteries. "Frequently Asked Questions." Accessed April 1, 2020.
- Gallup. "About Half of Americans Play State Lotteries." Accessed April 1, 2020.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.