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Lottery/gambling winnings - How much could you owe in tax?

A Fountain Valley gas station recently sold a winning Powerball ticket worth approximately $1.6 million. But no tickets were sold that matched all six numbers, so the jackpot was expected to grow to $435 million for the Saturday drawing.

While on the way to get your ticket, consider the CNBC statistic that the odds of winning the grand prize are 1 in 292,201,338. Even with long odds though, you could win. How much tax would you owe Uncle Sam?

Top tax bracket

A large jackpot could bump you into the 39.6 percent federal tax bracket. Then California state taxes will also take a bite. Generally, 25 percent of the total is immediately subtracted by the U.S. government. Any additional tax would need to be paid over time. 

The advertised jackpot is also only if you take the winnings over a number of years – usually 30 payments. Requesting a lump sum payment reduces the amount to a “cash value” amount, which could reduce the amount by 30 to 40 percent.

Winning a new Lexus or vacation to Hawaii is also taxable based on the fair market value of the prize as well.

Gambling losses

If you itemize deductions, you would be able to deduct gambling losses up to amount of gambling income. This loss is classified as “Other Miscellaneous Deduction” on a Schedule A.

You do need to keep detailed records of winnings and losses, because this is a highly audited area. An accurate written record of winnings and losses that includes receipts, tickets or statements may be requested in an audit.

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