Categories
BLOG

state not paying lottery winners

Stories of Lottery Winners Not Being Paid

For most people, a winning lottery ticket is an easy ticket to a life that others only dream about. But in some instances, it could remain as nothing more than a piece of paper. Like in any game, things can go wrong for whatever reason – whether it’s the player’s fault or not – and the promised prize may remain just as out of reach as ever.

Historically, it’s happened many times in the past. Here are some stories of lottery winners getting their hopes up, only to be disappointed later on.

Illinois Refuses to Pay Millions in Lottery Winnings Due to State Budget Crisis

“We want our money!”

In late 2015, a group of lottery winners whose prizes totaled about $288 million came together for an interview with Inside Edition, demanding that the Illinois Lottery pay them what they are owed. The group, made up of different jackpot winners from the state, was visibly furious and distraught after the lottery had recently announced that they weren’t paying out prizes over $600.

Tom Zimmerman, attorney to some members of the group, had this to say about the situation: “If any private business would engage in this kind of conduct selling tickets and not paying out the winners, the state would come in and they would shut them down and indict them for fraud.” You can check out the video below and see for yourself.

This wasn’t the first time the state has been unable to pay up. In July 2015, the Illinois Lottery started issuing IOU’s instead of checks to their winners. The problem? A massive $120 billion deficit that threatened much more than just the state lottery. The situation was so bleak that the lottery operator had to stop selling Powerball and Mega Millions tickets altogether. Some winners even sued the lottery for their inability to pay out prizes.

Fortunately in 2017, with the state’s budget impasse resolved, regular lottery operations had resumed.

So is Illinois paying out lottery winners now?

Yes. The Illinois Lottery now has the funds to pay out big and small winners alike. In fact, the lottery paid out over $1.8 billion in prizes for the fiscal year 2018.

South Carolina System Error Prints Thousands of False Winning Lottery Tickets

Back in December 25 2017, thousands of instant tickets with winning combinations were being printed across gas stations and convenience stores in South Carolina. Lottery machines churned out a seemingly endless stream of winning Holiday Cash Add-a-Play tickets from 5:51 PM to 7:53 PM. Naturally, it didn’t take long for people to notice.

With thousands of tickets now in the possession of expectant “winners,” it seemed like it was going to be a very special Christmas for South Carolinians. However, all those dreams were quickly squashed by the South Carolina Education Lottery (SCEL) just two days later.

In a statement, the lottery operator claimed that the winning tickets were printed anomalously due to a coding error by Intralot, the lottery’s system supplier at the time. Because of the erroneous code, all the winning tickets were considered invalid. They announced to the public that anyone who purchased a ticket during the two-hour window could mail in said tickets for a refund on the cost, but nothing more. People weren’t happy, and lawsuits were already being set into motion, but the SCEL didn’t budge.

Intralot is no longer in charge of the lottery’s computer systems, having been replaced with IGT in early 2018.

Crooks Buy Winning Lottery Ticket with Stolen Debit Card, UK National Lottery Won’t Pay

In April 2019, just days after being released from prison, Mark Goodram from Bolton, purchased a winning scratch ticket that was worth £4 with his friend Jon-Ross Watson. They immediately went on a four-day binge – drinking champagne and posting about it on social media. However, they never got their prize.

Both had rather extensive criminal records – which in itself shouldn’t prevent them from claiming their prize, but it served as another piece of evidence against them. The first red flag was raised when Camelot, the operator of the UK National Lottery, discovered that neither of the two had a bank account. Upon further prodding, it became evident that the winning ticket in their possession was purchased with a debit card that wasn’t theirs.

The two, now dubbed “The Blotto Lads,” denied having stolen the card, claiming that it belonged to their friend “John” who lent them the card. When asked to provide their friend’s address or contact number, the two were unable to do so. The mysterious John character has yet to forward.

Up to this day, Camelot has put the multi-million prize on hold amidst a legal battle with the now infamous pair.

What would you do if you were in these people’s shoes? Would you accept the lottery’s decisions or do as most of these people did and take them to court? Let us know in the comments section below.

Read about lottery winners from all over who anticipate receiving a massive prize, only to be disappointed by some tragic circumstance.

Best and Worst States to Pay Taxes on Lottery Winnings

Some states are far kinder to lottery winners than others

The odds against winning the Powerball lottery are about one in about 292 million, and Mega Millions is even worse: one in about 303 million.   And yet someone will eventually manage to do it, and they’ll have to pay taxes on their winnings. The federal government will want a piece of the prize, and the state taxing authority will likely have its hand out for a share as well. However, some states are much kinder than others when it comes to taxing lottery winnings.

You’re not going to receive that whole walloping amount if you take the money in a lump sum. The full advertised jackpot is the most you can win—it’s reserved for those who accept their winnings as annuities, so the money is paid out over a span of years. Either way, a somewhat significant percentage of your lottery winnings might go to taxes.

Federal Taxes on Lottery Winnings

FICA taxes—Social Security and Medicare—are employment taxes. They’re imposed on earned income, so here’s the good news: Lottery winnings are exempt from FICA taxes because they’re not earned income.

The IRS does require that lottery officials withhold income taxes from your winnings, however, if you win $5,000 or more after subtracting the cost of your ticket. The withholding rate is 24%. The IRS treats that 24% withholding just the same as it would if your employer withheld taxes from your paychecks. It will send you a refund if you don’t end up owing that much when you file your tax return.  

You’ll have to dig into those winnings a little more to pay additional taxes if you end up owing more than 24%—and that’s probable, given the tax brackets that a significant jackpot would push you into.

The top federal tax rate in tax year 2020 is 37% on incomes over $518,400 for single taxpayers, or $622,050 if you’re married and filing a joint return.   In tax year 2021, these incomes increase to $523,600 and $628,300, respectively.  

This means you’ll pay 37% income tax on the portion of your winnings that exceeds these amounts.

Other Lottery Taxes Vary by State

States with the highest top income tax rates pose a tough tax burden as well. New York is one example, particularly if you live in New York City, which will also want a cut of your winnings. New York’s top state tax rate is 8.82% as of 2020, but then you’ll have to add another 3.867% for the local tax.     That can work out to a hefty nearly 12.7% of your winnings. Your tax bill would come to almost $127,000 if you won $1 million, and about $12.7 million if you won $100 million. But if you live elsewhere in New York and don’t have to pay local income taxes, the state actually falls to fifth place overall.

The Worst States for Lottery Taxes

New Jersey comes in as the worst state for lottery taxes, with a 10.75% top tax rate as of 2020. Oregon takes second place at 9.9%. Minnesota comes in third at 9.85%, followed by the District of Columbia at 8.95% and New York at 8.82%.  

Rounding out the list of the 10 states with high tax rates are:

  • Vermont: 8.7%
  • Iowa: 8.53%
  • Wisconsin: 7.65%
  • Maine: 7.15%
  • South Carolina: 7.0%

The hit you’ll take depends on the exact threshold where these top tax rates kick in and on how much you’ve won. For example, you’d only have to pay 9.9% in Oregon if you won more than $125 million, and you’d pay this rate only on the portion of your winnings that exceeds this amount. You’d pay 9% if you won $124,999,999 or less.  

All this assumes that your state participates in a national lottery and that it taxes lottery winnings. For example, Hawaii’s top income tax rate is a hefty 11%, but you can’t play Powerball there. It’s one of six states that don’t participate, and it’s a very long swim to the mainland to purchase a lottery ticket. Other states that don’t participate in Powerball are Alabama, Alaska, Mississippi, Nevada, and Utah.

The Kindest States for Lottery Taxes

Obviously, your best bet for avoiding lottery taxes is to live in one of the states that doesn’t have an income tax at all as of 2020: Florida, South Dakota, Texas, Washington, and Wyoming. Alaska and Nevada don’t tax income, either, but they don’t participate in national lotteries.  

Then there are an additional couple of states that kindly refrain from taxing lottery winnings: California and Delaware will generously let you keep your jackpot tax-free.   This is particularly convenient in California, where the top tax rate is even worse than what you’d pay in New York City: 13.30% as of 2020.  

That leaves us with the states with the lowest top tax rates as of 2020:  

  • Tennessee: 1%
  • North Dakota: 2.90%
  • Pennsylvania: 3.07%
  • Indiana: 3.23%
  • Michigan: 4.25%
  • Arizona: 4.50%
  • Colorado: 4.63%
  • New Mexico: 4.90%
  • Illinois and Utah: 4.95%
  • Ohio: 4.797% 

Tennessee and New Hampshire tax only interest and dividend income, and Tennessee is repealing even that tax beginning in 2021.

State Lotteries vs. Other Winnings

Keep in mind that these rankings are for national lottery winnings. As a general rule, other types of winnings are considered income, but they’re not always subject to the withholding rule, and they might not be subject to FICA taxes. However, you might still have to pay income tax on the money.

Some Small Tax Perks

You can deduct gambling losses if you itemize and if you spend more money trying to win than you actually end up winning, but only up to the amount of your winnings. In other words, you wouldn’t have to pay a tax on your prize money, but you couldn’t use the balance of your losses to offset your other income.  

Another deduction you can take on your federal return to try to nip away at your tax bill is for the income taxes you must pay to your state on your winnings. Unfortunately, the Tax Cuts and Jobs Act limits this itemized deduction to $10,000 for tax years 2018 through 2025, and to just $5,000 if you’re married and filing a separate return.   This is just a drop in the bucket if your winnings are significant.

Lottery winnings aren’t income tax-free. The IRS and some states will take a share of your windfall, but some states don’t tax lottery winnings at all. ]]>