Someone just won $30 million in the California SuperLotto Plus. It wasn’t me. Doesn’t it burn you up when you look up your numbers and someone else has won?
Playing the lottery isn’t the only way to try your luck and make it big these days. With the proliferation of game shows, reality shows, Internet games, and sweepstakes, you might be closer to having your own “prize-winning day” someday.
After the elation—the jumping and screaming, the celebrating and leaping, the gamboling and shrieking—dies down, it’s time to look at the tax side of the win, and what you’ll owe Uncle Sam.
Taxes on Lottery Winnings
First things first: You need to report the winnings on line 21, “Other income,” on Form 1040 and on the related state tax form.
Typically, states with lotteries, or shares in multistate lotteries, don’t tax your winnings. Naturally, the IRS taxes you on all wins—at your highest tax rate (28–35 percent).
You can receive lottery payouts in a lump sum or over several years. Good money managers should take the lump sum and invest the money. Folks whose money somehow manages to trickle away should opt for annual payments.
A few things to keep in mind: If you get all the money at once, it tends to disappear rapidly—going to federal taxes, old debts, new relatives, new best friends, and luxurious indulgences. An article published a few years ago in Milwaukee Magazine called “Lottery Hell” outlined the bad things that have happened to winners. If you take the money over several years, even if you squander it in the early years, you’ll have it replenished each year. You can start afresh.
Once you settle down and are ready to invest the money, be wise. Don’t buy lots of assets that are encumbered by high mortgages. One woman I knew followed the advice of those “buy with nothing down” folks. At the end of her twenty-year payout, she had no savings, lots of real estate with negative cash flows, and a ton of other debt.
Taxes on Game Show Winnings and the Like
A lot of TV shows are giving away prizes. You don’t even have to be on the show to win. You could simply be a member of the studio audience (both Oprah and Ellen DeGeneres give prizes to their audiences). You could even be a member of the show’s club, watching from home. On the Wheel of Fortune, you could win as much as $50,000 if you have a Sony card (I just signed up for mine!).
So how do you handle the taxes on these prizes?
Everyone wants a piece of these winnings!
When you’re in the studio audience, you must pay taxes on the fair market value (or list price) of the prize or gift to the state where the show is filmed, to the IRS, and to your own state, if you live in a different state.
Reduce the tax bite in three ways:
- Get physical, printable proof of the true cost of the prize—what people really pay. That information is online, in ads, in brochures, and a number of other places.
- Sell the prize. What you sell it for is the fair market value—unless you sell it to a family member or good friend for a mere pittance. If you do sell it, report the sale on Schedule D. Your cost will be the same as the selling price, since you’re reporting the prize as income.
- Find out if your state offers a tax credit for taxes paid to the state where the prize was won. This can help save you money on your own state taxes.
However you deal with the taxes, first relish the experience. Winning is such a rush!
Eva Rosenberg, EA, is the publisher of TaxMama.com®, where your tax questions are answered. She teaches tax professionals how to represent you when you have tax problems. She is the author of several books and e-books, including Small Business Taxes Made Easy. Follow her on Twitter: @TaxMama