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What Is a Lottery Tax?

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  • Written By: John Lister
  • Edited By: O. Wallace
  • Last Modified Date: 22 November 2016
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A lottery tax is money paid by the winner of a lottery prize as part of the tax system. Depending on local prevailing legislation, this can be a specific tax levy, or simply a payment made as part of income taxes. With some lotteries, particularly those run by government agencies, the prize money may be specifically exempted from tax liabilities. A lottery tax may also refer to the proportion of money from lottery sales that is taken by a government under the terms of licensing the lottery's operation.

The precise rules on whether a lottery winner must pay tax vary from country to country and state to state. For example, in the United States, lottery wins are counted as income for tax purposes, meaning they can attract both federal and state taxes. In the United Kingdom, lottery wins are not taxable. While some countries have specific tax rules for lotteries, others simply deal with the prizes in the same way as other gambling wins.

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There are several factors that can make lottery tax extremely complicated. For example, some lotteries offer winners of jackpot prizes a choice between a single cash sum and a smaller annual payment made for a fixed number of years or until the winner dies. This can affect the tax situation, as can any arrangement by which the annual payments rise to account for interest or inflation. The tax treatment of lottery wins by a syndicate of players may vary and can depend on whether they had a formal or informal arrangement.

There may also be a lottery tax on the operators of the lottery, in two different forms. In one form, the lottery will have to operate to a fixed formula as part of a legal license to operate. This formula will mean a fixed percentage of ticket revenue goes towards prizes, a percentage is retained by the operators, a percentage may go to a government or independent agency to help fund local or national services and charities, and a percentage will be paid to the government as a tax. The second form is where the operators are not under such restrictions, in which case they will normally have to pay corporate income taxes on any profits they make.

The term lottery tax also has a third, much more informal, meaning. The phrase is sometimes used to refer to the concept that a lottery acts as a tax against lack of intelligence or lack of mathematical skills. This is because, despite the high prizes on offer, statistically the average player will lose money and the prizes are nowhere near big enough to fairly match the actual chances of winning.

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