Are Lottery Winnings Treated as Income

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Are Lottery Winnings Treated as Income
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  • Author:
    William Monroe
  • Published:
    13/01/2023

Are lottery winnings taxable like income?

Many jurisdictions around the world run lotteries and there are many similarities and differences between them. But one of the more interesting rules in winning a lottery jackpot is whether you have to pay income tax or other taxes on your lottery prize. Whether you have to pay taxes on lottery jackpots vary from country to country where in some countries you do not have to to pay any tax on lottery winnings, and in other countries not only is there an automatic holding of a certain percentage of federal tax but there is also a mandatory reporting of lottery winnings on your income tax form. To see how this works, let’s look at winning a lottery jackpot in the United States as opposed to winning a lottery jackpot in Canada.

Taxable income and the IRS

When a person wins a large jackpot in the United States, their winnings are subject to federal tax, as lottery winnings are considered to be ordinary taxable income for both federal and state tax purposes. Winnings are taxed the same as they are for wages or salaries, and the total amount the winner receives must be reported on their tax return each year. Before the winner receives any of the money, the IRS automatically takes 24% of the winnings. The rest of the taxes are expected to be paid by the winner when filing their return,.and to report those winnings as income on your federal tax return. If you fail to report taxable income such as lottery winnings on your tax return, you could owe additional tax, interest, and even financial penalties so managing your money is imperative.

Lottery winnings may also be subject to state taxes as well, as some states consider lottery winnings to be income, while other states do not. So in some states you will end up losing more money through additional state taxes unless you reside in a no lottery tax state, where all you pay is federal tax. Regardless, when you win a lottery jackpot in the United States you will eventually end up receiving far less in an actual payout than what you initially won.

Different countries different rules

In Canada. Lottery winnings are not subject to tax as they are considered to be windfalls and not income. Lottery prizes are not consistent source of revenu nor guaranteed in any way and therefore are not regarded as any type of income and do not have to declared on your income tax form. The only time you would have to pay taxes in regard to lottery winnings in Canada is having to report and pay taxes on any money earned through investment of your lottery winnings. Interest and such earned on the principal lottery amount is considered to be income and is subject to regular income tax rules. So the lottery jackpot prize you win is the lottery jackpot prize you get to keep.

Whether lottery winnings are taxed are subject to the interpretation of the country the lottery is won in as to whether lottery prizes are unexpected windfalls, simple good luck, or income obtained by a game of chance. So you should check into your country’s tax rules for lottery jackpot wins because what you win may not be what you get.

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