The Internal Revenue Service considers lottery prizes taxable income. Depending on how much you win with a scratch ticket, there might not be any taxes taken out of your prize immediately. However, you're responsible for reporting your winnings on your tax return so the money can be taxed at your regular income tax rate.
Winners Up to $599
In most states, when your scratch ticket wins less than $600, you can cash it in at local retailers that sell lottery games. In most cases, you can turn in scratch tickets that win $50 or less at any lottery retailer, and those over $50 at larger retailers such as major grocery stores. Stores don't collect your personal information. If you win less than $600, they don't deduct any taxes from your cash.
Winners Over $600
In most states, if your prize from one scratch ticket is $600 or more, you'll need to turn it in to the lottery commission. When you turn in your ticket, you'll also need to fill out a claim form before you can get your check. You'll provide your name, address and Social Security number on the form. The state uses this information to issue a Form W2-G to you at the end of the year and report your prize to the Internal Revenue Service. Most states deduct federal and state income taxes from prize amounts of more than $5,000. By law, the IRS requires a flat 25 percent withholding from prizes that exceed this amount. State withholding varies.
Although retailers who pay out scratch prizes worth less than $600 aren't required to report to the IRS, your winnings are still considered taxable income. It should be reported on your tax return as "Other Income." Your tax rate is based on your yearly income, including wages, interest income, profit or loss from a small business and unemployment compensation.
If you itemize deductions and file Schedule A with your federal tax return, you may be able to deduct money you lost from gambling during the year. The IRS allows you to deduct up to the amount you claim in taxable income as a gambling loss. However, your deductible loss is limited to amounts of more than 2 percent of your adjusted gross income, and you may not deduct more than the winnings you claim as income.
- BananaStock/BananaStock/Getty Images
- How Much Can You Give to Charity Tax-Free if You Win the Lottery?
- Do You Have to Amend a Return if You Are Not Otherwise Required to File to Capital Loss Carryover?
- Do I Owe Social Security Tax if I Am Self Employed & I Had a Loss?
- Raffles as an IRS Donation Deduction
- Are Individual Stock Market Gains Taxable?
- Taxes on Inherited Coins