Taxes on Lottery & Gambling Winnings: What You Need to Know

Is lottery & gambling income taxable?

Winnings from lottery and gambling activity must be reported on your tax return and are fully taxable by the IRS and most state governments. The only allowed deductions are the various wager or ticket costs and then only when you itemize deductions. Winnings from foreign countries, as well as multi-national and international gambling, are also taxable and must be included on your federal return.

What classifies as gambling?

Lottery and gambling winnings include cash and the fair market value of cars, trips, and merchandise. Gambling income includes winnings from:

• Sports events or “pools” (i.e. Super Bowl, March Madness, etc.)
• Bingo
• Slot machines
• Games shows
• Poker
• Raffles
• Lottery drawings
• Scratch-off cards
• Racing (such as; car, horse, dog racing)

How to report lottery and gambling winnings 

Lottery and gambling winnings including the fair market value of items won, such as new appliances, trips, and cars must be reported to the IRS on Form W-2G, Certain Gambling Winnings by the paying organization – this form will also be sent to you by the paying organization. You must report all lottery and gambling winnings as “Other Income” on Form 1040, Schedule 1 including winnings that are not reported on Form W-2G.

If you are a nonresident alien of the U.S. use Form 1040NR Nonresident Alien Income Tax Return to report lottery and gambling winnings.

How are lottery winnings taxed by state?

Lottery winnings are taxed as income at the state and local level and vary by location. For instance, New York has one of the highest tax rates on lottery winnings at 10.9%. Some states do not levy income tax or tax lottery winnings, they include:

• Alaska
• California
• Delaware
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Should you take a lump sum or annuity payments?

Lottery winners have the option to take their money in one lump sum or annuity payments spread out over a period of years. With a lump-sum payment, taxes are taken out on the full amount before the money is issued. Winners have the entire amount of after-tax money to save, invest, or share as they like. Winners with smart, disciplined money habits could retain or even grow their winnings. Conversely, winners who lack such discipline could lose their money.

Winners who choose annuity payments get a guaranteed income stream for a number of years. They also pay taxes each year on the lottery money  received. 

How to calculate taxes on lottery and gambling winnings or losses

Gambling winnings

The IRS requires 24% of gambling winnings to be withheld upon distribution of the winnings. The dollar threshold amount triggering this withholding is determined by the type of gambling. However, depending on the tax bracket you are in, this may not be enough to cover your tax bill. You can make estimated tax payments if you think you may owe more. Like the IRS, most states treat lottery and gambling winnings as income subject to tax, so the total amount of tax you owe from your winnings depends on where you live. 

Gambling losses

You can deduct gambling losses up to the amount of your winnings on Form 1040, Schedule A only if you itemize your deductions. You cannot claim gambling losses if you take the standard deduction. The IRS requires accurate records like receipts, tickets and other statements that clearly show your wins and losses in order to claim your losses. Generally, nonresident aliens of the United States who aren't residents of Canada can't deduct gambling losses. 

FAQs 

Lottery:

Do you pay taxes on lottery winnings every year?

If you took your lottery winnings as a lump sum payment you will pay taxes on your winnings only in the year in which those winnings were received. If you agree to take your lottery winnings as annual payments, you will pay taxes on the amount of the lottery winnings you receive each year at the rate applicable to your then-current income bracket.  

Are lottery tickets tax-deductible?

Yes. IRS rules for gambling losses apply to lottery tickets. The cost of those tickets can be taken as an itemized deduction to offset any kind of gambling winnings --lotteries, horse racing, cards, et cetera. But if there are no winnings, there is no deduction. 

Do seniors pay taxes on lottery winnings?

Everyone is required to report gambling winnings over a certain amount. In many instances, casinos will take your information and issue a Form W-2G. Whether or not seniors pay taxes on their winnings is determined by their taxable income. When the amount of winnings is below the standard deduction amount, seniors, like other taxpayers, may not have to pay taxes. 

Which states tax lottery winnings?

All states except the following eleven, along with Puerto Rico and the U.S. Virgin Islands, do not tax national lottery winnings: Alaska, California, Delaware, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. All other states do tax national lottery winnings. 

What happens if I win the lottery in another state?

As a general rule, if you live in one state and win a lottery in another, you are first taxed by the state where you bought the lottery ticket. Then your winnings are taxed by the state you live in. You can claim a credit for the taxes paid to the state you bought the ticket in and when your home state has the same or a lower tax rate than the other state, you may not have to pay taxes in your state on the winnings.

Gambling:

How much money can you win gambling without paying taxes?

All winnings, no matter how small, are taxable. When, and if, you receive a W-2G for your winnings is based on the type of gambling.

Do you pay social security tax on gambling winnings?

No. Social Security and Medicare taxes are only assessed on earned income. Lottery and gambling winnings are not considered earned income. The Net Investment Income tax is also not assessed on lottery and gambling winnings.

Do foreigners pay taxes on gambling winnings?

The IRS requires U.S. nonresidents to report gambling winnings on Form 1040NR. Such income is generally taxed at a flat rate of 30%. Nonresident aliens generally cannot deduct gambling losses. The only exception is Canadian residents as there is a tax treaty between the United States and Canada. 

Do you have to report casino winnings to the IRS?

Gambling winnings are fully taxable and you must report the income on your tax return, even if you don’t get a Form W-2G. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. 

What happens if I don’t report my gambling winnings?

The IRS and the states compare income reported to them with the income reported on a tax return. If you don’t report your winnings, you can be assessed penalties and interest as well as any taxes due.