How Does a Lottery Winner Determine Taxes?

  1. Overview

    Lottery winnings are taxable

    • When one wins the lottery, the gigantic number displayed as the grand prize will never be the actual amount received by the winner. Lottery winnings are subject to federal income tax, and considering the size of most lottery winnings, the federal tax is usually pushed to the maximum level -- usually around 40 percent of the winnings. In addition to federal taxes, states may require additional taxes on lottery winnings, which can push the tax over 50 percent in some cases. To determine the exact tax rate for lottery winnings, one must find out what the tax rate for lottery winnings in their state is and add that number to the federal tax rate appropriate for their income level, factoring in the lottery winnings.

    Gambling losses are an itemized deduction

    • Losses can be written off on taxes as an itemized deduction. The amount deducted for taxes cannot be greater than the amount of winnings. Whatever money the winner spent buying tickets -- as well as gambling in other ways -- can be deducted from taxes. This law is primarily beneficial to those who spend large sums of money betting and gambling in casinos.

    Non-cash prizes are also taxed

    • While a traditional lottery involves paying money for a ticket in order to win a large lump sum of cash, other types of lotteries or raffles may involve winning a non-cash prize, such as a car, a trip or real estate. Even lotteries involving non-cash prizes are taxable by the federal government up to the value of the items being given away. The drawback with non-cash prizes is that the winner cannot pay the tax incurred out of his winnings, meaning the tax must be covered with other earnings or savings. Therefore, if a person does not really want an item he wins, it is sometimes best to sell it or not accept the prize at all. Vacation packages are an example of something that may not be worth accepting if you do not have the money to pay the taxes, as they aren't easily transferred or sold.

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