Category: Individual Tax Planning
Posted: August 2019
Did you know that lottery winnings ARE taxable? This is the case for cash winnings and for the fair market value of any noncash prizes you may win, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. In Michigan, your lottery winnings are also subject to state income tax. You don't get any capital gains rate break for lottery winnings. Nor is there any income averaging to lower your tax bill.
On the other hand, you are entitled to a tax deduction for any gambling losses you had. These are taken as an itemized deduction* but cannot exceed your winnings. If your lottery winnings are payable in annual installments, the installments you receive in future years are still gambling winnings, making losses in those future years deductible to the extent of the installments, even if you have no other gambling winnings in those years.
To establish your entitlement to a deduction for gambling losses, you should keep documentary evidence of the costs of your wagers—both the cost of your lottery tickets and of any other wagering you do, such as betting on races, casino games, etc. The evidence should consist of receipts for tickets, wagers, cancelled checks, credit card charges, losing tickets, etc. Make sure you do this for all the years in which you're receiving installment payments of your lottery winnings.
If you have been fortunate enough to win a sizeable lottery prize, contact us for help in making the right choices related to your prize, estate and taxes.*Miscellaneous itemized deductions and overall limitation on itemized deductions are suspended for tax years 2018-2025
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