Your odds of winning the lottery may be slim, but if you DO hit the jackpot, you need to be prepared for the taxes that come with it.
While you don't have to report lottery winnings of $600 or less, if you win more than $5,000, the government will hit you with a 25 percent federal withholding tax. However, California, Pennsylvania and states with no income tax (you go, New Hampshire), will not tax your lottery winnings. So before you spend all your winnings, remember that some of that cash belongs to Uncle Sam. Crooked lottery winners who want to evade paying taxes on their winnings can buy or rent truckloads of used lottery tickets and show them to IRS auditors as "proof" that their gambling losses exceeding their winnings.
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The long-term shift in tax burdens from capital and corporations to individuals and their activities is perhaps best illustrated by the rise of state lotteries, the most heavily taxed consumer product in America. Because gambling is voluntary, there is little organized opposition to levies on gambling winnings. In 11 states, lotteries provided more revenue than the state corporate income tax in 2009, Tax Foundation data show. State income taxes typically equal five percentage points or so of income recognized in a state, whether paid to individuals or corporations.
This shift from corporate to lottery revenues was unimaginable just half a century ago, when gambling was a crime everywhere except Nevada — the residue of scandals in the 1890s that killed off widespread legal gambling.
These days the 44 states with lotteries (plus the District of Columbia and Puerto Rico) get 44 cents from this form of gambling for each dollar of state corporate income tax.
Even more remarkable is the continuing popularity of state lotteries despite significantly high tax rates, noted Charles T.
Americans spent $50.4 billion on lottery tickets, video lottery terminals and the like in fiscal 2009, according to the North American Association of State and Provincial Lotteries.


On top of the 30 percent profit margin, administrative and promotional costs total about 8 percent of sales, according to David Gale, executive director of the lotteries association.
On top of that, people winning $600 or more had their income reported to state and federal tax authorities. Like many other public finance economists, Thompson sees lotteries as a tax that falls mostly on the working poor, albeit voluntarily. The trend toward easy reliance on expanded lotteries, however, has not meant a surge in revenues as the economy has made modest gains.
State corporate income taxes at the end of calendar 2010 were 17.2 percent higher than a year earlier, the Nelson A. But as states add more games, allow more video lottery terminals in bars and restaurants and spend to encourage gambling, it is likely that revenues will rise.
The historic progression, Rose said, is from complicated paper-form lotteries like the one New Hampshire instituted in 1963, setting off the return of lotteries, to video games to full blown casinos.
With global competition to attract capital, and no more resistance to what had been seen half a century ago as the evils of gambling that would bring ruin on us all, expect more state-sponsored gambling in the years ahead. We welcome comments that advance the story through relevant opinion, anecdotes, links and data. Though none of this smells very pretty, “Is not a rose still a rose by any other name”? Reuters columnist David Cay Johnston is the president of Investigative Reporters & Editors (IRE), an education organization with 4,200 members. Reuters Analysis & Opinion Hardliner elected as head of Iran’s top clerical body By Reuters Staff Strikes upset France’s reform calculus By Swaha Pattanaik Tata’s portfolio power still just about adds up By Una Galani 2nd Circuit in Libor case v. Win $400,000 or more for a single person or $450,000 for a couple and the tax rate jumps to, gulp, 39.6 percent. If you live in Arizona, you'll be slammed with a 5 percent tax on the prize, while nonresidents will have to dole out 6 percent [source: Ellis]. One comment in particular, though, set her reeling — and came to exemplify her experiences there. Contrast that with the ferocious, well-organized and well-financed opposition to income taxes, especially corporate income taxes. The Rhode Island lottery netted the state more than $3 for each dollar of state corporate income tax in fiscal 2009. Overall, lotteries pay out only about 62 percent of their revenue as winnings, an implicit 38 percent tax rate on lottery tickets.
Clotfelter, a Duke University professor of law and economics who co-authored pioneering studies of lottery winners two decades ago.


The 44 states with lotteries, plus the District of Columbia and Puerto Rico, pocketed $17.6 billion of lottery profits. Federal and state income taxes combined could take as little as nothing to close to 45 percent of the win for those in the top federal brackets in high-tax places such as New York City or Hawaii and who either do not itemize or fall under the alternative minimum tax. And Thompson is among those who see the corporate income tax as a levy mostly on corporation owners, who by definition are wealthier than most people. Nelson Rose, the Whittier College law professor who wrote a book describing three waves of American gambling — colonial times, the late 19th Century and our own times starting in 1963. Dan Sarro, who handles finances for the Rhode Island lottery, noted that traditional lottery tickets provide less than 6 percent of state lottery profits, while the video lottery terminals, which work like slot machines, are available at just two locations, but produce 94 percent of the state’s gross lottery profits. It is almost certain that in the future more than 11 states will rely on a voluntary tax paid by those hoping to strike it rich to bring in more revenue than taxes on corporations. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. A 13-year veteran of The New York Times, David won the Pulitzer Prize in 2001 for enterprise reporting that uncovered loopholes and inequities in the U.S. It used to be 35 percent until the government almost went over the financial cliff in late 2012. Anderson has written more than 125 books, including 52 national or international bestsellers. On top of that, people who win $600 or more have their take reported to federal and state tax authorities and must pay income taxes of up to 45 percent on their windfalls. The greatest number of Americans, however, would face a federal tax of 15 percent plus the state tax of about 5 percent. The $17.9 billion in fiscal 2010 state lottery profits was nearly the same as a year earlier. He wrote the best selling tax books Perfectly Legal, which won an IRE medal, and Free Lunch. His latest book, The Fine Print: How Big Companies Use "Plain English" to Rob You Blind, will be published in September. But, if on the off chance you do win millions in a lottery jackpot, keep in mind that the Internal Revenue Service will be looking for its fair share.
He is a research director at Institute for the Future and editor-in-chief of Cool Tools and co-founder of Wink Books.




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