Tax Consequences of Winning the Lottery

Lottery is a process of selecting a person or an entity by random selection. It may be used to fill vacancies in a sports team among equally competing players, placements in schools and universities and so on. Lottery is a form of gambling, but it can also be seen as a public service. If the entertainment value (or other non-monetary gain) obtained from playing the lottery is high enough for an individual, then the purchase of a ticket may represent a rational decision. However, winning the lottery carries substantial tax consequences, and winners must be careful to consider these before making a decision.

In 2021, US citizens spent upwards of $100 billion on lottery tickets. Most states promote the lottery as a way to raise revenue, but they never make it clear how much money this amounts to in terms of overall state budgets and whether it’s worth the trade-off of people losing a significant amount of their hard-earned money. They also never really discuss the social mobility costs associated with a lottery-based system.

Some state governments withhold income taxes from the winnings, while others don’t. In either case, the winners are still obligated to pay federal taxes, and many people find themselves struggling after a big win. A story in the New York Times this week highlighted one such winner, a man in his 30s who lives in a small apartment with his girlfriend and works at a gas station. Four months ago, they were hotel hopping each week and barely able to feed themselves.