Monday, November 14, 2011

The Truth Behind Lotteries and Taxes


One thing you need to know is that unless otherwise indicated, anything that you win through raffle draws are subject to tax. This is why you would hear some raffle draws boasting that their contest is tax free. This is also the reason why most people become hesitant to join a particular contest because they know that the grand prize might not be given to them in its entirety. Should they win, even if the prize is a car or any other material form, they might still be subject to pay for its corresponding tax amount before they can fully retrieve the said prize.

This principle is also applied among games such as the lottery. The USA Mega Millions as well as the American Powerball may have different schemes in terms of tax deductions but in the end it all boils down to this fact—whatever you win will be taxed so you should not expect to get the full amount. If ever you will encounter a raffle draw promising that you are in no way going to shoulder any tax, you should be wary. Make sure that you ask around if that game is legitimate and if the said game is willing to shoulder the tax for the grand prize.

How the Tax Works

Regardless of where you may be taking up residence, as a winner you are automatically subject to a full 38% from the total amount prize you have won. Lotteries based in the United States follow this protocol when it comes to giving payouts. All winnings that exceed $600 are also subject to the said tax. You no longer have to worry about paying this yourself just to get the prize money because even before you will get the latter, this tax would already be deducted from your winnings.

This tax should be something that you report to the government within the year when you have received it. You would report this in the form of the total income that you received within the year that you have won. This report would also depend on the way you have received your winnings—whether it was given to you in installments or was given through a lump sum.

As soon as you have settled the legalities and formalities of winning the lottery, the payer should automatically give you a W-2G form which would document the taxation. Make sure you take time to read what it says specifically the amount indicated which you have won and how much has been given to you so far. Aside from this, the payer would also ask you to provide them your Social Security number so that it would be promptly recorded and also to avoid you from paying an additional 31%.

Aside from the lottery’s tax proper, a state income might also be required. This actually depends on where the lottery was won. In some cases this might no longer be required but make sure you see it documented on paper should it also be deducted from your winnings.

Is There A Way to Escape This?

The short answer no, though a controversial answer would be yes. In essence, the government does not take its time to individually check on who wins and how much is being paid off. Consider the fact that there may be lots of winners daily so you really can’t say if the government can come barging at your door forcing you to pay the tax that you chose to brush off. 

But then again, most of the lotteries would already provide you with taxed prize money. This is also something they do rather religiously because it would affect the reputation of your game. There are little known instances wherein the winners are given the task to fix the tax process themselves. Usually it is already done prior to giving the payout so that the necessary documentations would already be done.

Also, there are a lot of repercussions to brushing off your tax. The IRS can have a way of tracking you done. Some people also choose to not include their lottery earnings with their annual income tax but that is also wrong. You should include your lottery winnings because it is already part of your asset. Think of it as work that pays in one huge lump sum. If you also report it, it means that the money you have earned is not ill-gotten wealth and is something that is duly noted by the government. You might have more problems in the future if you choose otherwise.

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