The odds of winning a billion-dollar Powerball are about 1 in 88 quadrillion, according to the Allstate Data Science Team in 2018. Scratch-off tickets, on the other hand, may top out at about $3 million in prizes, but your chances of winning increase exponentially when you play this colorful version of the gas station lottery. Odds, of course, vary per ticket, but your chances of winning lower payouts often range from about 5-to-1 to as high as 3-to-1 when you play scratchers.
After you've achieved sweet scratch-off victory and finished doing your very best end-zone dance in front of everyone at the 7-Eleven, it's time for just a bit of reality to set in – you'll have to consider taxes on the lottery tickets. Whether you play scratch-offs or Powerball, your chances of paying taxes on winning big are pretty high, but the more modest dollar amounts reaped by scratch-offs also makes for more modest taxation.
TL;DR (Too Long; Didn't Read)
State tax rates on lottery winnings vary, typically hovering around 5-to-7 percent, but you'll always have to pay federal taxes on winnings over $600, although there are no withholding taxes for a win under $5,000.
Taxes on Big Wins
Once you sit down and do a little math, those outrageous Powerball winnings – though still massive – look at lot less lucrative after the Internal Revenue Service has taken a bite out of your lotto pie. Let's say you take the lump sum of a jackpot advertised at $1.5 billion to $1.586 billion (the record-setting figure from 2016). If you take the lump sum, that'll range from about $877 million to $930 million. Now consider the 25 percent federal tax rate on prize winnings, plus the 37 percent top federal tax rate on income, not to mention any other withholding that may vary by state. In real-world money, you'll be left with something closer to about $490 to $585 million, post-taxes.
Taxes aren't quite as brutal on scratch-off lottery tickets; they won't outright rain on your parade, but they sure can drizzle on it a bit.
Taxes on Smaller Prizes
The reason your odds of winning scratch-off lottery tickets are so much higher than winning a billion-dollar jackpot is a matter of simple economics: The winnings are typically much, much smaller. It's not uncommon to score $5, $10 or $20 from a one-dollar gas station lottery scratcher. You don't have to worry about taxes on these amounts.
Just as with contest prizes, awards or raffles, the federal government treats scratch-off lottery winnings as ordinary income, tax-wise, and that applies regardless of how much you win. The IRS requests that you report even the smallest winnings. And prize issuers are required to report winnings of $600 or more, so you'll get a Form 1099-MISC reporting those winnings – considered "Other Income" – at tax time, which will add to your income total. Your tax rate, as always, is determined by your income level.
So, as of 2018 income tax brackets, you'll be paying 12 percent on total earnings of $9,526 to $38,700 for individuals or $19,051 to $77,400 when filing jointly. That jumps to 22 percent for individuals earning $38,701 to $82,500 or couples earning $77,401 to $165,000 and continues to rise as income levels rise, topping out at 37 percent.
These rates will be paid at tax time when you usually pay income taxes. Additionally, the IRS withholds 25 percent of any cash prizes of $5,000 or more; those taxes will be taken right out of your winnings check.
Tax Rates by State
In general, lottery winnings of both the Powerball and scratch-off variety are taxed as ordinary income on both the state and federal level. While federal taxes are, of course, consistent nationwide, state taxes vary depending on where you're doing the scratching (and the winning).
Residents of California, Delaware and Pennsylvania are extra lucky, as these states do not tax state lottery winnings at all. Some states, like Maryland and Arizona, enforce different tax rates for residents and non-residents – lucky visitors may find themselves feeling a little less fortunate when they're subject to double the withholding when compared to state residents. New York also has some wacky laws that tax residents of Yonkers and New York City more than other residents. It's not uncommon for tax rates to jump as the winnings get higher. In New Jersey, for instance, the regular state tax rate for winnings is 5 percent on winnings between $10,000 and $500,000. Beyond $500,000, the rate is 8 percent.
State tax laws on winnings vary widely all across the U.S., both regarding tax rate and minimum amount of winnings before taxes are enforced. If a state imposes taxes on your scratch-off haul at all, the tax rates on winnings for in-state residents span between a generously tiny 3.4 percent in Indiana to a much more noticeable 8.97 percent in New York. That rate jumps to 9.87 percent if you win in Yonkers, or to a whopping 12.61 percent in New York City.
Claiming Winnings, Paying Taxes
To redeem scratch-off lottery ticket winnings, you'll typically have a few different options for collecting. This process varies by state and ticket type, but you can commonly collect scratch-off winnings (and Powerball winnings, for that matter) of $599 and under right on the spot, directly from the clerk at the retailer where you purchased the ticket. For winnings of $600 or more, you'll usually need to sign the ticket and head over to the state's lottery website to download and fill out a claim form, which includes your basic identification and contact info, optional demographic stats and ticket information such as ticket number and the prize amount claimed. For tax and security purposes, it's best to keep a copy of your signed winning ticket and a copy of your claim form on file.
After you mail in the claim form (with your signed ticket) and the state files it, your information will likely be disclosed to the State Controller's Office, Franchise Tax Board, Health and Welfare Agency and the Internal Revenue Service. When you receive your winnings check from the state – a process which usually takes a few weeks – the federal taxes will already have been taken out from the total. Likewise, though, many states will withhold taxes automatically on lottery winnings over $5,000. Some states do not withhold off the bat, meaning you'll have to pay when tax season rolls around. If your state does withhold, you'll get a refund when you file your tax return.
More on Scratch-Off Taxes
The 25-percent federal tax rate on larger winnings applies to United States citizens and resident aliens. However, if you're a U.S. citizen or resident alien and you don't provide a Social Security number, that tax rate gets bumped up to 28 percent. If you're not a U.S. citizen or a resident alien, prepare to have 30 percent of your scratch-off winnings withheld from all prizes.
If you itemize your taxes when it comes time for the tax man to collect, you can deduct your gambling losses up to the amount of your gambling winnings. There is what's known as a "gray market" of sellers hawking losing scratch-off tickets on marketplace sites such as Craigslist, with the idea being that buyers can use the losing tickets to deduct gambling expenses from their lotto winnings. Some shady companies even "rent" losing lottery tickets to gamblers in the case of an IRS audit. This is, of course, a form of fraud – don't do it. Chances are, whatever you pay in taxes will be far less of a hit than what you'll owe when you try to scam the IRS.
To file on the up-and-up, report your total lotto winnings on U.S. Form 1040, line 21. To deduct the cost of your losing scratch-off and other lotto tickets from the taxable year (the actual ones, not the ones you bought from Craigslist), use Form 1040, Schedule A and fill out the "Itemized Deductions" section.
- CBS News: Odds of Winning $1 Billion Mega Millions and Powerball: 1 in 88 Quadrillion
- LegitGamblingSites.com: Can You Really Win on Lottery Scratch-Off Tickets?
- Intuit Turbotax: Tallying Up the Taxes of Powerball Winnings
- Intuit Turbotax: If I Have a $1,000 CA Scratcher Win, Will I Receive the Full $1,000 and Only Pay Federal Tax at Tax Time, or Will Some of That Check Be Withheld When It's Issued as Well
- CA Lottery: Claiming Prizes
- CA Lottery: Winner Claim
- The Daily Beast: IRS Scammed with Losing Lotto Tickets
- Tax Foundation: What Percentage of Lottery Winnings Will Be Withheld in Your State?
- Tax Foundation: Lottery Tax Rates Vary Greatly by State
- NJ Lottery: Claim a Prize and Tax Requirements
- Mass.gov: Learn About Gambling and the Lottery in Massachusetts
- CNBC: One Ticket Won the $1.5 Billion Mega Millions – Here's Who Won the 5 Biggest U.S. Lottery Prizes Ever
- eFile.com: Taxes on Gambling Winnings and Deducting Gambling Losses
- H&R Block: Should You Pay Taxes on Prize Money?
- Forbes: The New 2018 Federal Income Tax Brackets and Rates
- Intuit TurboTax: How Are Gambling Winnings Taxed?
Dan's decade-long experience as a freelance writer and small business owner has seen him contribute to financial publications including Chron.com, Zacks.com, MSN Money, Fortune, Motley Fool and others.