Have you ever wondered if there is a way to avoid taxes on lottery winnings and preserve that prize that you probably took a long time to win? There are six ways that work in most countries – or states if there are variations – and that can help you avoid taxes in a legal way. Depending on the case, you might avoid having to pay more than half in deductions and taxes.
Quick Jump
How Are Lottery Winnings Taxed Nowadays?
Lottery winnings are taxed in two ways. First, some countries will have a federal tax that is specifically applied to winnings above a certain limit, and at least small lottery winnings can avoid taxes entirely. Below, you find the federal tax on lottery winnings in some countries:
| Country | Tax | Minimum Threshold |
|---|---|---|
| Switzerland | 35% | 1,000 CHF |
| India | 30.9% | Rs 10,000 |
| United States | 24% | $5,000 |
| Romania | 1% | 16% | 25% | 0 | €15,000 | €100,000 |
| Italy | 20% | €500 |
| Philippines | 20% | ₱10,000 |
| Spain | 20% | €2,500 |
| Portugal | 20% | €5,000 |
| Poland | 10% | PLN 2280 |
On the other hand, in both countries that collect taxes on lottery winnings and those that do not, there are other indirect taxes that affect your money. For example, to name a country where lotteries are not taxed, Brazil has a 30% tax on income that includes lottery winnings. The same goes for the US, which, on top of lottery taxes, has different IRS (income tax) brackets of up to 37% on top of the direct taxes.
Aside from the income tax, it might be worth considering inheritance taxes. The United Kingdom, another country with 0% lottery taxes, takes up to 40% in inheritance taxes, so you will see your prize melt a bit more if you leave it for your heirs.
In short, you will never win the lottery and keep the full prize, even when there are no lottery taxes. You can use our lottery tax calculator to have an idea of how much you will have to pay.
Lottery Taxes at State and Municipality Levels
Another concern that I must highlight before I introduce how to avoid taxes on lottery winnings is the lottery taxes applied in states and cities. That is a very specific case in the United States, where each state may determine its own taxes on lottery games.
There are states with 0% state lottery taxes, like Washington and Texas. On the other hand, New York has a surprising 8.82% on top of everything you will have to pay already, followed by Maryland, Oregon, and New Jersey.
Therefore, when considering the legal ways to avoid taxes on lottery winnings, remember that additional cost if you live in the United States.
How to Legally Avoid Taxes on Lottery Winnings? 6 Ways Out
Tax evasion is definitely not the way to go if you want to reduce the total deductions and avoid taxes. Instead, you need to work with the legal tools that are possibly within your reach, and I have brought six of them that can help you in that task.
1. Annuities Instead of a Lump-Sum Payment
Opting for annuities over lump-sum payments is the easiest way to reduce taxes on lottery winnings if you are willing to accept the most obvious consequence. You will receive annual payments instead of a big prize – they can still be incredible depending on the jackpot – and that is not ideal for everyone.
In order to let you know how much you can actually save from your lottery winnings, take a look at the simple example of a $1,000,000 jackpot. If you play games like Powerball or Mega Millions, simply increase the example prize and see how much you would save:
| Payment Type | Lump-Sum Payment | Annuity Prize |
|---|---|---|
| Total Winnings | $1,000,000 | $1,000,000 |
| No. of Payments | 1 | 20 |
| Year 1 Payment | $700,000 (*) | $50,000 |
| Year 1 Taxes | $259,000 | $11,000 |
| Total Taxes | $259,000 | $220,000 |
| Total Saved in Taxes | $0 | $39,000 |
| Net Winnings | $441,000 | $780,000 |
(*) Lump-sum payments have a natural deduction that has nothing to do with taxes.
Therefore, although the total saved in taxes does not seem to be much, the cash option with one payment already starts about 30% smaller. In total, it turns out that patience pays off really well.
Also, this comparison only considered the 37% IRS. Federal and state taxes would still take even more of those prizes, but since they are subject to the same taxes, keeping it simple helped us understand the differences.
2. Donations to Charity
It is common to find donation stories among the most exciting lottery winners’ stories. They are most probably due to kindness, but be aware that donations can help you ease taxes on your lottery winnings.
Depending on the specific regulations in your country, the limit as to how much you can deduct from your income tax may vary. In some cases, you might be able to eliminate around 60% of the taxes by donating that money and perhaps even carry other donations to deduct from your taxes next year.
That is an excellent tool, especially when the income tax comes especially harsh on lottery winners regardless of where they live. However, remember that you will not keep that money but rather help charity, such as through child support, instead of giving it out to the government.
3. General Deductions Approved By the Law
Since we are talking a lot about income tax and how it is a nightmare for lottery winners everywhere, deductions are an obligatory subject. When filing your income tax, you will have different ways to deduct your tax in general, and that may come in handy.
Among the possibilities, consider the following if you ever win the lottery:
- Interest on mortgage
- Allowed deductions with family and children
- Medical debts
- Paid local/state taxes
- Expenses with education
Once again, we are working here to reduce taxes on lottery winnings that apply to your income tax. There is no way to make federal lottery taxes lower, such as the 24% tax from the United States. On the other hand, if you live in countries with no lottery tax, like Germany, the income tax is the only one to worry about.
4. Recorded Gambling Losses
If you keep track of your losses while trying to win the lottery, you might be able to deduct them from your winnings. You will most probably not get a lot to reduce when compared to a big lottery prize, but any way to avoid taxes on lottery winnings should be welcome.
5. Professional Tax Support
Since there is a lot to be paid in the lottery and income taxes when you win the lottery, it is important not to fail or forget about something and end up with a large fine. Having professional support is one of the most important things to do when you win the lottery because you need to manage that money well and know where you invest it.
More importantly, that support can let you know exactly how much you need to pay in taxes. That way, you can avoid paying too much but also prevent paying less than you should, which could result in paying fines and enlarging your debt.
6. Setting Up a Trust
It is common to see people setting up trusts to remain anonymous after they win the lottery, but that is not the only use for them. A trust can assist you in growing your assets free of taxes – after all, preventing high taxes on your investments is also important, not only focusing on the lottery prizes. Also, estate taxes for couples can be reduced with a trust.
Keep that and a lawyer in mind if you ever win the lottery.
Should You Avoid Taxes on Lottery Winnings?
We saw that it is possible to avoid taxes on lottery winnings when it comes to income taxes, and that is a fact even in countries where lottery taxes do not exist. Of course, tax evasion is not an option, and you will still have to pay out something. Still, there are better destinations for that money, and you can reduce taxes, even if only a portion of it.
If you can put any of the six hints into practice, do not hesitate to make better choices for your lottery winnings. Otherwise, you will end up, in many cases, losing half or even more of your prize.
