Winning the lottery is something most people dream about. The chance of absolute financial freedom is the reason why people play the lottery in the first place. But if you live in a country where lotteries are taxed you may have to give a large chunk of your winnings to the government.
But there are ways you can work around lottery taxes. In this post, we’ve provided information on how lotteries are taxed, the tax rate by country, and the reason why governments tax winners. You’ll also learn how to avoid taxes on lottery winnings.
How Are Lottery Winnings Taxed?
The way lottery winnings are taxed will depend on the country you live in. Some countries such as South Africa or the UK don’t tax lottery winners. However, the United States is infamous for implementing extremely high tax rates on lottery winnings.
Taxes are taken from lottery winnings in percentages. Each country that taxes winners may have different rules for taxing lottery winners. Below you’ll find how some countries tax their lottery winners whether it’s a high jackpot or prizes from lower tiers:
- United States: In America, taxes on winnings must be reported as ordinary income regardless of the amount you win. You’ll pay federal and state taxes if the state you live in taxes winners. The tax rate will then be determined by the amount you put on your federal income tax document. You must report lottery winnings in box one on your IRS Form W-2G.
- Italy: If you play SuperEnalotto in Italy, Sisal will automatically withhold your taxes owed. You will then receive a post-tax sum and a certificate notifying you that your tax has already been paid.
- Spain: In this country, any prize that is €2500 and below is tax-free. Prizes above this amount will be taxed. There’s no need to fill out special forms because taxes are deducted from your winnings before they’re paid to you.
- Portugal: There are two tax categories. Any prize of or below €5,000 is tax-free. Prizes above €5,000 will be taxed automatically before your money is paid out to you.
It may be unavoidable to pay taxes in countries that automatically deduct the amount before you receive your winnings. In the US it might be easier to avoid taxes legally because the amount isn’t taxed automatically.
How Much is Taxed from Lottery Winnings?
The amount you’re taxed on lottery winnings will depend on the country you reside in and the rules and regulations implemented by the governments who control these lotteries. Furthermore, places such as the US will have different tax brackets or rates depending on the state you reside in. Take a look at the table below to find out how much each country taxes its lottery winners.
|Tax Amount on Lotteries
|Between 8% and 25% depending on the state you live in
|10% to 20% depending on the amount you win
If you don’t want to pay tax on your lottery winnings then play games from countries that don’t tax winners such as:
- South Africa
You can play lotteries from these countries through online lottery sites such as TheLotter or WinTrillions. If you play through these online lottery sites, we recommend that you read the terms and conditions for every lottery you play to find out if you’ll be taxed on winnings.
Why Do Governments Tax Lottery Winners?
Governments tax lottery winners for the same reason they tax you on your income. Tax money is the primary source of revenue for some governments and it’s used to improve and maintain infrastructure such as:
- The roads you travel on
- Government buildings
- Water supplies
- Nature reserves
Additionally, tax money can be used to fund public services such as government hospitals, the post office, and welfare programs. Some countries that have higher tax rates fund everything from schooling to medical care.
Other countries use money taxed from lottery winners for good causes such as funding children’s homes. Taxes are meant to improve a country’s operations whether it’s deducted from your income or from your lottery winnings.
Can You Avoid Paying Taxes on Lottery Winnings?
If you live in a country that taxes lottery winners there may not be any way you can avoid paying those taxes. This is especially true if the lottery deducts your taxes before paying your winnings. However, there are ways that you can reduce the amount of taxes you’re subjected to.
But the rules on paying taxes on lotteries in the US are absolute. If you avoid paying taxes you could face jail time. That’s why you must use legal ways to reduce the amount you have to pay to the government. Or simply play in a country that doesn’t tax winners through sites such as LottoAgent.
Ways to Reduce Taxes on Lottery Winnings
If you’re looking for legal and trustworthy ways to reduce taxes on lottery winnings then you’ll find valuable information in this section. Here we discuss ways to avoid lottery taxes completely and ways to reduce the rate on taxes.
Claim Your Winnings Through a Trust
Setting up a trust not only reduces tax rates but also allows you to claim your lottery winnings anonymously. If you create your trust correctly you can have tax-free growth on your assets or reduce state taxes if you’re married.
Although you still have to pay taxes on your lottery winnings, placing your prize money into a trust can accumulate interest. Therefore, you may be able to make money back that you paid out in taxes quickly without making investments. Claiming your lottery through a trust is also a form of security against con artists who are trying to take your winnings.
There are two types of trusts you can claim lottery winnings: Blind and revocable trusts. To set up a trust you’ll need to hire a professional lawyer to draft your claim agreements. Your lawyer will know exactly how to create the trust you need to claim your lottery winnings.
Choose Lump Sum Instead of Annuity
There are two ways you can claim your lottery winnings. Either through a lump sum or annuity option. A lump sum is when a lottery winner chooses to draw out the full amount that they’ve won. On the other hand, an annuity option will provide you with annual payments over the next 30 years of your life.
To reduce taxes on your lottery winnings, we recommended taking out the lump sum option because you’ll only be charged tax once after your payment. If you choose the annuity option you will be taxed on all 30 annual payments which could be more than what you’d be charged if you took out the lump sum.
It should be noted that you’ll also be taxed on any investments you make with your winnings. But you also have the potential to grow your fortune depending on how you manage your finances. Additionally, not all lotteries offer both options. In the UK, you’re only provided with the lump sum option but the advantage is, that they don’t tax winners.
Play the Lottery in a Country that Doesn’t Tax Winners
The best way to avoid paying taxes on lottery winnings completely is to play lottery games in countries that don’t charge taxes on prizes. You can either visit the country and play the lottery from any local lottery retailer or play games through lottery sites.
UK National Lottery doesn’t charge taxes and neither does the South African National Lottery. You can also play the German lottery such as 6aus49 and win higher jackpots of up to €45.4 million but without the burden of being taxed.
Give Charitable Donations
Who would’ve thought that giving to the less fortunate can reduce your lottery taxes? In the US, when filling out your tax form you can deduct charitable donations from your taxable income. But it should be noted that there is a limit on the value of your charitable deduction in relation to your gross income.
For example, your charitable deduction is limited to 60% but in some instances, it can be lower. This is especially true if you’re contributing to long-term capital gain. But if you’ve reached your charitable deductible limit you can carry it over to the next tax year.
Consider Hiring a Tax Advisor
Winning large sums of money can be overwhelming especially if you struggle to manage your finances effectively. If you struggle to handle money then we recommend hiring a tax advisor or a financial manager.
Professional advisors can help you make smart choices when dealing with your lottery winnings. With the help of a professional, you can set up trusts, avoid making poor investments and help you understand the consequences of your financial decisions.
Lastly, a professional advisor can provide tips to help you avoid high taxes on your winnings and how to manage your money so you don’t pay high taxes on investments.
As you can see, there are ways that you can completely avoid paying taxes on lottery wins and there are tips to simply reduce taxes on winnings. The tax rate you pay will depend on the country you live in because every government has different rules on taxation on lottery winnings.
If you want to reduce the amount of tax you pay on lottery winnings, then use the tips in this article. The best way to avoid tax on lottery winnings completely is to play non-taxable lotteries through sights such as LottoSmile or TheLotter.