You’ve Won the Lottery…Who Gets a Cut of It?

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IRS NewsIt’s something most of us have dreamt about (even if just being completely silly): winning the lottery. In fact, I once worked with a woman who had her entire lottery winnings worked out, complete with the amount she would give to each of her family members, the house she was going to buy, and the debts she was going to pay, etc.

Honestly, I thought that was quite detailed. And then I met someone else who volunteered exactly how she was going to dole out her lottery winnings as well!

Even though your chances (and mine) of ever winning the lottery are extremely slim, it doesn’t mean it won’t happen.

In fact, my husband and I were gifted a scratch-off lottery ticket two Christmases ago and came out $20 ahead!

So if you ever were to win the lottery — and my fingers are crossed for you — who can get their hands on your money before you do?

Uncle Sam Plus Local Governments

You have to pay taxes on your lottery winnings just as if you had earned them at your day job.

Taxes may come out:

  • Before you receive the payment in the form of estimated taxes, if you won enough money to meet the threshold
  • After you file a tax return (you must report earnings of over $600, and will receive form W-2G, on the line for gambling winnings, Line 21 in fact, on Form 1040)

In addition to paying new taxes, federal and state governments will place a tax lien against you if you owe any back taxes, even if you are paying on the arrears owed through payroll deduction or another way. This is called a tax lien intercept.

It is important to note that since the federal government views lottery winnings as gambling income, you get to deduct your losses (i.e. the cost of tickets), if you itemize your deductions. So if you spent $150 on lottery tickets to win, you can deduct the full “loss” up to the amount of your winnings. Won $5,000? You can deduct the full $150. Won $100? You can only deduct $100 of that $150.

You claim your losses on line 28 of Schedule A on the 1040 tax form.

Debt Collectors

Depending on where you live, if you have a judgment against you, the court can sanction a garnishment of lottery winnings. In order for a creditor to be able to do this, the creditor must go to court with a debt judgment in hand, and ask for a garnishment order.

It should also be noted that aside from collecting for past child-support or past tax bills, only a handful of states permit private creditors to garnish lottery winnings.

But that does not save you from creditors enlisting the help of non-wage garnishments. Basically this is when creditors collect money directly from your bank account. So if your lottery winnings are mixed in with other money in your bank account, it could be open season for creditors.

State Governments

Do you owe back-child support? State agencies can deduct back-child support owed from your lottery winnings and send them to your child’s legal guardian.

Non-Back Child Support

Since your lottery winnings are seen as income in the eyes of the government, part of your earnings will be taken out to put towards child support (even if you don’t owe back child support; this is a bonus payment for your child). It should be noted that the state agency will determine what amount goes towards child support after you pay any liens put on the lottery winnings from government agencies.

Depending on the size of your winnings, it may be a great idea to talk to a certified public accountant (CPA) or a Certified Financial Planner (CFP). These people can help you determine whether it’s best to take a lump sum or an annuity, and to correctly pay whatever taxes owed.

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