Why are lottery winnings taxed

[RedHawk]

The thread on the lottery and life insurance got me thinking. As I understand it, life insurance proceeds are not taxed with the explanation that the premiums were paid with after tax money. Therefore, why are lottery winnings taxed? It seems like they are almost the same thing. Lots of people pay a small amount of money and someone or a small group of people get a large payout. Obviously, life insurance payouts are under much different cirumstances than a lottery payout so maybe the government is just being nice not to tax widows.

 

[lazygood4nothinbum]

does that depend on whether you're cashing in your own life insurance or if someone collected on your death? while life insurance is not figured as income tax, it is figured in the total estate which might be subject to an estate tax.

i'm not sure but i don't think the florida lottery is not subject to any state tax. just the federal one. i'll let you know how badly i feel about paying tax on the lottery just as soon as i win one.

 

[Spanky]

If life insurance is paid by an employer, the first $50,000 of death benefits are income tax free but the rest is taxed.

 

[Spanky]

i'll let you know how badly i feel about paying tax on the lottery just as soon as i win one.

I will be glad to pay the tax if I win one.

 

[JustCurious]

Therefore, why are lottery winnings taxed?

1. Because it is income, and 2. because they can.

 

[Alan]

I don't know about the lottery in England but decades ago the government figured out how to get even more taxes out of Horse racing. When you place a bet on a horse in England you pay taxes on any winnings. The bookshop withholds it from your winnings. However, you can choose to pay the taxes on your bet, which many (most?) folks do. They would rather pay an extra 15p on a 1 pound bet than 3 pound on the winnings if the horse comes in at 20-1. I don't know what the actual tax rates are these days but I always found it amusing that the government allows you to gamble with the potentail taxes on your winnings.

 

[Alan]

Just checked out the UK lottery and the winnings are tax free. Wow, I'm amazed they don't tax something that the US gov't does tax.

Are gambling or National Lottery gains taxed?
The National Lottery always appears to be in the news. Is it true that Lottery and other gambling winnings are tax free?

Unless your winnings are connected with your business e.g. if you are, yourself, a bookmaker or you run a casino, all gambling winnings are tax free. The downside is that you cannot claim tax relief for gambling losses, even if you are a professional gambler.

 

[Goonie]

I will be glad to pay the tax if I win one.

I would too! But it will take a bonafide miracle for me to win.....I won't play pay.

There's a guy at w*rk that has spend $10 a week on the lottery for years.....hasn't won more than a few bucks in all that time. I told him to give me the $10 every Friday, and then every Monday I would give him at least a portion of it back....somewhere 'tween $1 and $10. That way he always wins something, and I get free money!!! (He hasn't taken me up on it yet)

 

[Ed_The_Gypsy]

The Canadians do not tax their lottery winnings. But, if I win, I still have to pay in the US.

 

[bssc]

Gambling winnings are taxed as income but you can write off any gambling losses for the year against it. For more see:
http://www.irs.gov/taxtopics/tc419.html

 

[lswswein]

Its all income so will be taxed. With insurance I guess it won't be your income.
Btw stolen goods are taxed at thier FMV unless you return them to the owner before filing taxes, becasue that is also income

 

[Texas Proud]

Lets not forget about who and what is taxing...

Yes, I am sure the UK is not taxed... but it is a NATIONAL lottery... I would assume that same for Canada... so they don't tax the winnings as they get the proceeds...

Lotteries in the US are state run... the feds get nothing of the money paid for the tickets... SO, they get paid from the winnings... maybe someone from a state that has income tax will let us know if that state taxes their own lottery... here in Texas they don't

As for life insurance... it is NOT that it was paid for by taxed income that makes it tax free... it is that it is like other assets in an estate... think of it as stock... if the person sold it prior to dying, they pay tax on the income... if they cashed the policy in prior to dying they pay tax on the income... if they die, there is a step up in basis and NO income is in the policy...

But as was pointed out, both the stock and life insurance is part of the taxable estate...

Now, I know that a policy can be in a trust etc.... and is not taxed as income... but that is from the strength of the insurance lobby... not because it is bought with taxed money...

 

[sgeeeee]

Why are lottery winnings taxed

Why does a dog lick . . ?

 

[clifp]

I am not an excessively cynical person, but the answer is pretty straightforward. The owners and CEOs of the insurance business are a wealthy and influential group. They have historically been one of the more actively lobbying industries, consequently they get lots of tax breaks, and the tax code is filled with special insurance exemptions.

In contrast Lotto winners, are not even influential after they win, and before hand well lets just say I doubt they increase the average IQ in the country.

 

[Sandy]

i'm not sure but i don't think the florida lottery is not subject to any state tax. just the federal one. i'll let you know how badly i feel about paying tax on the lottery just as soon as i win one.

To clarify: Florida doesn't have a state income tax, only sales taxes.

1. Because it is income, and 2. because they can.

Yep.

Are you looking for rationale logic in the tax code?

 

[saluki9]

The govt has always used the tax code to encourage and discourage behavior. Why do you think mortgage interest is tax deductible in the US?

The govt wants to encourage people to buy insurance so that they don't wind up having to take care of people. It also helps that the insurance lobby is one of the strongest there is.

 

[retire@40]

The govt has always used the tax code to encourage and discourage behavior. Why do you think mortgage interest is tax deductible in the US?

The govt wants to encourage people to buy insurance so that they don't wind up having to take care of people. It also helps that the insurance lobby is one of the strongest there is.

That's the best answer so far.

When they tax my earned income, I wonder if I should take that as a hint.

 

[maddythebeagle]

That's the best answer so far.

When they tax my earned income, I wonder if I should take that as a hint.

 

[d]

2. because they can.

this is clearly the best answer to the question.

 

[macdaddy]

Couldn't you make the argument that US lottery winnings should be taxed as a capital gain?

Also if I can write off gambling losses... if I win 300m in the powerball and owe 100m in tax... couldn't I just go put 100m on red in vegas, and if I lose, write it off, coming out even?

 

[cute fuzzy bunny]

They're taxed because they can be, and nobody will feel at all sympathetic to someone who won $200M and had to pay a lot of taxes.

 

[Nords]

They're taxed because they can be, and nobody will feel at all sympathetic to someone who won $200M and had to pay a lot of taxes.

The Canadians do not tax their lottery winnings. But, if I win, I still have to pay in the US.

Ed, would our American patriotism really survive winning $113M?

I'd seriously consider dropping my passport in the return mail on my way to the nearest Thai massage parlor...

 

[Gone4Good]

Lotteries are a huge revenue generator for the state making up about 2% of all state revenue and as much as 8% for some states. When viewed appropriately as a regressive tax scheme, it makes perfect sense that the government minimizes its losses by taxing distributions.

 

[Ed_The_Gypsy]

I'd seriously consider dropping my passport in the return mail on my way to the nearest Thai massage parlor...

No joy, Nords. Even if one renounces one's US citizenship, one owes taxes to Uncle for the next ten years. Ask Mark Mobius.

Pay and sleep well.

 

[Texas Proud]

Couldn't you make the argument that US lottery winnings should be taxed as a capital gain?

Also if I can write off gambling losses... if I win 300m in the powerball and owe 100m in tax... couldn't I just go put 100m on red in vegas, and if I lose, write it off, coming out even?

No... it is not a capital asset...

No... you can write off the $100m from the$300m and pay taxes on the remaining $200m... the write off is not a credit..