The following questions are targeted primarily toward US residents.
Do I have to pay tax on my lottery innings?
Yes. You are subject to the tax rules where you live, as well as the location where the lottery was held, if it was different from where you live. No US-based lottery will pay out any winnings without first deducting some taxes on those winnings - usually about 38%.
Do I have to pay tax on lottery winnings if the government doesn't find out?
Yes. You have to pay tax on all your income whether the government knows about it or not. For example, if you bought only one scratch ticket during the year for $5 and won $50 then you would be required to report the $45 net winnings as income (gambling winnings) on your tax return. But nobody really does this because the government could never really find out about small scratch ticket winnings. But you still owe taxes on that money.
Do I have to pay taxes on a lottery prize from another country?
Yes. US citizens are subject to taxation on income they receive from anywhere in the world, including gambling winnings.
Is it true that Canadian citizens don't pay taxes on lottery wins?
Yes. If a Canadian wins the Canadian lottery, the winnings are not subject to taxes. All lottery payments are in cash, with no deductions. Generally speaking, gambling, wagering and lottery winnings are not taxed in Canada unless the Canada Revenue Agency concludes that you are "carrying on the business of gambling" (i.e. that you are a professional gambler). Canadian tax policy has traditionally exempted gambling and lottery winnings from tax. The official source of this is the Department of Finance's "Tax Expenditures and Evaluations" companion document, published in 2004.
So if I won the Canadian lottery would I have to pay taxes to the US government?
Yes. Although no taxes would be withheld by the Canadian government, a US citizen would owe taxes to the US government. As previously stated, the US tax code requires you to pay taxes on all your income, including foreign income.
How does the lottery compare to other gambling ventures?
US state lotteries usually pays out about 60% of a players bet - so they keep 40% of the bet. This is way higher than other gambling choices. Most brick & mortar casinos usually keep about a 2-6% of a players bet. Online casinos usually take about 1-2%.
The lottery is a rip-off. The odds of winning the lottery are incredibly bad. Consider the following facts: Powerball is drawn twice a week. The odds of winning are 175,223,510 to 1. If you lived to be 77 years old (a normal life expectancy), then you would have to buy 21,881 tickets for EACH drawing (43,762 tickets each week) in order to have a 1-to-1 chance of winning.
Why do state governments have lotteries?
The state lottery is a tax. The state collects about 40 cents out of every dollar bet on the lottery as tax revenue and redistributes the money as it sees fit. Over the past few years, many state governments have been expanding their gambling operations in order to increase their gambling revenues so they can cover their budget shortfalls.
Are using state lotteries as a form of taxation a good thing? If someone can have fun and potentially win money, then isn't that better than just paying a tax?
It depends on your philosophy. Considering that the lottery is played more often by poor people, then the lottery-as-a-tax is a "regressive tax", which means poor people are taxed at a higher rate. All studies done on the subject have proven this. But people on the other side of the argument point out that poor people don't have any need to gamble, and therefore don't have to pay the tax. One difference is that wealthy people can gamble at much better odds in Las Vegas where they only lose about 2-6% of their money instead of the 40% that poor people lose because they are too poor to travel to Las Vegas. Another potential problem is that the government's promotion of gambling may reach a dangerous level if they needed the money bad enough.
Is the lottery tax then considered a voluntary tax?
No. Although playing the lottery is a voluntary activity, the lottery tax isn't a voluntary tax because you can't choose not to pay it. That's like saying income taxes are voluntary because you could choose not to have any income.
But isn't winning the lottery the American Dream?
Not necessarily. Some studies have shown that lottery winners claim that winning the lottery made their lives worse, not better.
Isn't playing the lottery the only way to get rich?
No, even though 33% of people polled in the US said that they believed playing the lottery was the only way to get rich. When interviewed in the book The Millionaire Next Door, most millionaires said they believe playing the lottery had a negative effect on wealth accumulation.
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