A Taxing Issue
While most lottery players are aware of the fact that lottery winnings are taxable income few are aware of the fact that lottery expenses are tax deductible, up to the total amount of the taxpayer’s lottery winnings in any given tax year.
Oklahoma Lottery players who win modest sums over the course of the year may be able to eliminate or at least reduce the ‘tax bite’ on such winnings by using their lottery expenses over the course of the year as a tax deduction.
For example, consider a hypothetical lottery player that purchases two $1 Powerball plays each week. Their total lottery expense would be $104 for the year (52 weeks times $2). If that player has lottery winnings of less than $105 dollars for the entire year their ‘net income’ from lottery winnings would be zero and they would have no tax liability on those winnings.
By the same token, if the lottery player’s winnings for the year are $200 and their lottery expense for the year is $104, their net lottery winnings would be $96. This amount would be reportable as taxable income.
In order to use lottery expenses to offset lottery winnings for tax purposes it is absolutely necessary to document lottery expenses. The only way to document lottery expenses is to retain all lottery ‘tickets’ purchased during the tax year. Lottery players that discard lottery tickets which failed to produce a win are throwing away legitimate tax deductions, if during the year they have any lottery winnings.
Lottery players should also be mindful of the fact that for tax purposes lottery expenses and lottery winnings are all lumped together, regardless of the lottery games played. This means that lottery expenses incurred playing the various games offered by the Oklahoma Lottery can be used to offset for tax purposes lottery winnings from any of the games comprising the Oklahoma Lottery.
For example, consider a hypothetical lottery player that purchases a $1 Pick 3 ticket each day of the year. Their lottery expense for Pick 3 would be $365 for a tax year which was not a leap year. If that player also purchases two $1 Powerball tickets each week their lottery expense for Powerball would be $104. Their combined lottery expense for the year would be $469. This combined lottery expense could be used to offset winnings from either or both games.
Since lottery wins from all games played and lottery expenses from all games played in any given year are lumped into total wins and total expenses for tax purposes, the tax aware lottery player should retain every lottery ticket they purchase throughout the year.
In addition to documenting lottery expenses for tax purposes, retaining all lottery tickets purchased during the year will provide the player with a very clear picture of how much money they spent playing the lottery.
Lottery players should also maintain at the minimum a running total of all their lottery winnings throughout the year. A detailed journal recording the date of lottery wins and the amount won would be much better. Every win, regardless of how small, should be recorded for tax purposes.
For the vast majority of lottery players their legitimate lottery expenses will exceed their lottery winnings in any given tax year and they will have a zero tax liability from their lottery wins. A few lucky souls will however have lottery wins exceeding their lottery expenses.
With larger prizes, those of $5,000 or more, the Oklahoma Lottery Commission automatically withholds taxes; 25% of the amount of the prize for federal taxes and 4% of the amount of the prize for state taxes. For lottery prizes of less than $5,000 no taxes are withheld, however lottery prizes greater than $600 are reported to the IRS using Form W2-G.
Failing to report taxable lottery winnings and paying the taxes due upon them is no different or less risky that failing to report and pay taxes on any other form of taxable income. It is the lottery player’s responsibility to keep adequate records of lottery winnings and to pay all taxes due. It is in the lottery player’s best interest to also keep adequate records (lottery tickets) of their lottery expenses to offset for tax purposes any lottery winnings.
There is a golden rule pertaining to lottery winnings and taxes. That golden rule states:
One’s odds of winning at least something playing the lottery are better than their odds of escaping IRS scrutiny if they fail to report and pay taxes on lottery winnings
One should always keep that golden rule in mind as they celebrate their lottery win…
