The Internal Revenue Service considers all lottery winnings as income for the lucky taxpayer. Regardless of the amount, it needs to show up on the taxpayers' federal individual income tax forms. Lottery income goes on Form 1040, and Schedule A must be attached if you're also claiming losses to offset the winnings. You must also file a W-2G form for single payouts of $600 or more.
The IRS doesn't ask the lottery to send forms for anything less than $600. If you win anything up to that amount, you're expected to keep your own records and report it at tax time. So the lotto corporation will not provide W-2G forms for small amounts such as a $20 scratch-off winner. But the IRS does consider that taxable income and expects it to be on the tax form. Use Form 1040, the U.S. Individual Income Tax Return, and report your total lottery winnings on Line 21 under "Other Income."
If your winnings are more than $5,000 after you deduct the wager, the lottery must withhold at least 25 percent of that prize for federal income taxes. They will stop at that amount if you give them your taxpayer identification number, which is usually your Social Security number. With no TIN available, the IRS cut jumps up to 28 percent. You can claim this as tax paid in Box 64 when filing your 1040 individual tax return.
When lottery winnings are disbursed in annual payments, each payment is subject to the 25 percent federal tax withholding. The taxpayer files each year on the amount of winnings received and taxes withheld as though it were a one-time payout.
Only taxpayers who itemize can claim gambling losses to offset winnings. The losses go on Line 28 of Form 1040 Schedule A as a miscellaneous deduction. The total losses can't exceed the winnings. You should keep records to support these claims in case you're ever asked to prove it. The IRS suggests keeping a gambling diary and retaining losing tickets, receipts and any other documents that prove the loss. Record dates, locations, and the types of tickets you got, as well as the names of people that can support your claims.
State Income Tax
States tax lottery winnings in different ways. A few don't do it at all. Taxpayers need to check the guidelines in their home state for more information. If they bought the ticket in another state, they also must check that state's rules. For example, Arizona taxes nonresidents who win that state. So, let's say someone from Ohio visiting Arizona gets lucky in a lottery there. That person will be subject to taxes from both states.
- Internal Revenue Service: Form 1040
- Internal Revenue Service: Instructions for Form 1040
- Internal Revenue Service: Instructions for Forms, W-2G and 5754 (2015)
- Internal Revenue Service: Tax Topics - Topic 419 Gambling Income and Losses
- Tax Foundation: Lottery Tax Rates Vary Greatly By State
- Internal Revenue Service: Publication 529, Miscellaneous Deductions
- Forbes: How Much Tax Will You Owe On A $600 Million Powerball Jackpot? A Lot More Than in 2012