Tax Implications of Winning the Lottery


Buying lottery tickets is often seen as a low risk investment with potentially huge rewards. However, a winning ticket can also have large tax implications and many lottery winners go broke within a couple of years of their big win. Americans spend over $80 Billion on lotteries every year – money that could be used to build an emergency fund or pay off debt. The best way to ensure a long-term success in the lottery is through a systematic approach, rather than just relying on gut feeling.

Lottery games have a predetermined prize pool, and the amount of the prize is based on the size and frequency of prizes set by the state or lottery promoters in advance. Expenses such as promotions, administrative costs and profits for the lottery organizer must be deducted from the prize pool before the total amount of money available to winners is determined. In addition to deciding how many large prizes are offered, the organizers of lottery must also determine whether they should offer one or several smaller prizes, and what the percentage of the prize pool should be allocated between each type of prize.

While some people make a living out of gambling, lottery is regressive and the vast majority of players come from the 21st through 60th percentiles of income distribution who have a few dollars for discretionary spending but not much more. It would be easy for them to replace the few dollars spent on lottery tickets with a dollar or two invested in their own education, health care and other productive activities.