February 2016

Uncle Sam is the True Lottery Winner

By Amy K. Frantz

Did you buy a lottery ticket when the Powerball jackpot recently reached $1.6 billion? Even though the odds of winning were 1 in 292 million, many people purchased a ticket or two (or several hundred!) and dreamed about what they would do with all that money if they won.  However, the one thing that every Powerball winner would do with some of the money is pay their federal and state tax liability.

Just how much money does the federal government take from lottery winners? The federal government withholds 25 percent of lottery winnings for federal taxes.  Then, when the winners file federal taxes the following April, they will have to pay the difference in what was withheld and what they owe.  “Lottery winnings are taxed just like any other income – in this case at the top federal and state income tax rates.”[1]  Tax Foundation calculates that had there been only one winner of the $1.6 billion Powerball jackpot, and had the winner chosen the lump sum option of $983.5 million, the federal withholding amount would have been $246 million and the winner would have owed another $144 million to the federal government when filing federal income taxes in April.[2]  The winner could reduce their tax bill somewhat by giving some of the lottery winnings to charity.

In Iowa, “by law, prizes of more than $600 will face a 5 percent state withholding tax.”[3]  Just as with the federal income tax, the winner would pay the difference in the amount withheld and the amount owed when filing state income taxes in April.

Depending on what the winner does with the money, additional taxes will likely be owed one way or another. “Non-charitable gifts of more than $14,000 a year or $5.45 million over a lifetime are taxed at the gift tax rate of 40 percent, so that should be kept in mind when the winner gives anything away to friends, family, or strangers.  Also, whatever you spend your money on will be subject to state sales tax.”[4]

And while you may believe that the individuals who purchased the winning Powerball tickets in California, Florida, and Tennessee were the big winners, the true big winner of any lottery is the government. “‘Of each dollar of Powerball sales, for example, only about 50 cents goes to prizes, with 30 cents out of that 50 cents put aside for the now growing jackpot.  The states’ profits come to about 40 cents of every dollar, with the remaining 10 cents going to commissions for sellers and the states’ own administrative expenses,’ estimates Texas Lottery Executive Director Gary Grief, who chairs the Powerball Game Group of the Multi-State Lottery Association, which runs the game.”[5]

State governments receive 40 percent of lottery ticket sales as profit, then the state and federal governments turn around and receive taxes from the individual winners. Government seems to be the big winner in the lottery game!

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Joseph Henchman, “Pretend You Won the Powerball. What Taxes Do You Owe?” Tax Foundation, The Tax Policy Blog, January 12, 2016, <http://taxfoundation.org/blog/pretend-you-won-powerball-what-taxes-do-you-owe> accessed January 21, 2016.

[2] Ibid.

[3] “Claiming Prizes FAQ,” Iowa Lottery, <http://www.ialottery.com/FAQs/FAQ-ClaimingPrizes.asp> accessed January 21, 2016.

[4] Henchman.

[5] Janet Novack, “The (State) House Always Wins: Taxes On A $1.5 Billion Jackpot Are The Least Of It,” Forbes, January 12, 2016, <http://www.forbes.com/sites/janetnovack/2016/01/12/the-state-house-always-wins-taxes-on-a-1-5-billion-jackpot-are-the-least-of-it/#61fc4ea66844> accessed January 21, 2016.