Yes, Americans Pay Taxes On Lottery Wins, The British Don’t – Win One For Brits

Something that astonishes Britons is that if you win the lottery in America then you’ve got to pay taxes on those winnings. Something that astonishes Americans is that winning the British lottery comes tax free. This is a very much better deal for Britons than it is for Americans, obviously enough. The difference is also based deeply in the way the law works in the respective places.

Essentially, American law sees gambling wins as income. English doesn’t. And with that there’s a whole set of differences, tax being only one of them. For example, in Britain you can’t sue over a gambling debt. Nor can you send in the bailiffs to collect on it. It’s all part and parcel of the same difference:

The Powerball jackpot just won’t quit. After no one hit all winning numbers in Saturday night’s drawing, the top prize has jumped to a whopping $750 million. And while players daydream about what they’d do with such a windfall, they should remember they wouldn’t really end up with the advertised amount. Whether you take the prize as an annuity spread out over three decades or as an immediate, reduced lump sum, 24 percent of your win is withheld for federal taxes. Yet the top marginal tax rate of 37 percent means you’d owe a lot more at tax time. And state taxes typically are due as well.

You could end up – if you’re in the wrong state – paying 50% of a win in taxes. This is particularly scumbag behaviour by the States as they’re the people who own the revenues from the extremely profitable lottery operations anyway. But then which bureaucracy wouldn’t double dip if it could?

The difference here is embedded deeply in the law. Gambling wins are not quite contractual in English law. A bookie refuses to pay out then he can lose business from other people. He can be shouted at by other bookies for bringing into disrepute and so on. He might lose a licence he’s got. But it’s still not a debt that you can go and use the courts to collect upon. Equally the other way. You gain a credit account at the bookies and they can’t then use the courts to collect on it. Nor send the bailiffs around to take your car in settlement. It is all simply not a legal debt nor contract in the conventional sense.

And, since you can’t use the power of the state to protect or collect then it’s thought of as not being taxable income. Things get a little grey if you’re the bookie carrying on betting as a trade but that’s rather different.

In the US it’s all just the same as any other contract or income. Thus tax is payable. The odds of winning on the government run lotteries aren’t that dissimilar. But that American tax bite makes it a much worse deal.

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Rhoda Klapp
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Rhoda Klapp

And if you buy a ticket there while on holiday and win, they will still keep the tax, whether you are a citizen of another country or not. Unless there’s a double taxation agreement AND the home country also charges tax on winnings. So Aussies can claim the tax back, Brits cannot. Although I have found that the biggest problem by far is getting that winning ticket.

TD
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TD

The odds of winning are about the same whether you buy a ticket or not.

Rhoda Klapp
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Rhoda Klapp

And yet, somebody wins, eventually.

Harlequin
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Harlequin

That certainly isn’t true for casino winnings. If you’re a Brit and you win big in Vegas, you can file a W8-BEN and get the whole sum of your winnings with no withholding. Applies even though the applicable UK rate is zero.

thammond
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thammond

But we do pay tax, just on the ticket we buy rather than if we win. We also lose 25% to the absurd “good causes”. Do US lotteries have deductions at that point as well?

timworstall
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timworstall

US lotteries have a decent tax take and profit built in for the states that own it, yes. Before those winnings are taxed again.