How the lottery preys on Americans
If you were told to voluntarily pay 75% of your wages to government-sponsored programs for the rare chance of getting everyone else’s remaining 25%, would you do it?
Most everyone enjoys dreaming of winning it big in the lottery. Large pots of money are publicized on the evening news and lucky multi-million-dollar winners are always given the media spotlight. Little do most people know, federal and state governments are quietly using this gambling device to double and triple-tax those who participate.
|Tax Events||You Must Earn||%|
|Tax Event 1
Taxes removed from wages
|Social Security: $0.82
|To Purchase $10 in Lottery Tickets
|Tax Event 2
The lottery takes their cut
15% to retailers;
marketing; operations: $1.50
25% to states for
their services: $2.50
|Available for the Winner
|Tax Event 3
Winnings are taxed
5% estimated state tax
(actual could range from 0 – 13.3%): $0.30
37% 2020 federal tax
(adjusted for state tax credit): $2.22
|After Tax Winnings
Net Result: Over $10.00 of your initial $13.87 wages go to fees and taxes when you play the lottery
Why is this happening?
A single lottery ticket does not cost a lot. The lucky winner is the one who pays the extra tax on everyone’s behalf, but they don’t care because the pot is so large. By taxing people in small stages and by shifting who pays the tax to the lottery winner, taxing authorities have come up with a productive high-tax formula.
What are your options?
If you think the funds being scooped up by the government is ethically wrong, what can you do about it? Here are some ideas:
- Stop buying tickets. If the lottery no longer generates sales, the programs would be discontinued.
- Pressure legislatures. Why aren’t lottery winnings taxed at a lower rate? Shouldn’t the government acknowledge they’ve already received tax on this income? We have lower tax rates on dividends and capital gains so why not on lottery winnings? If you agree, send a letter to your representative asking that lottery winnings be capped at the lowest income tax rate or at a special rate for lottery winnings.
- Tell everyone you know. If you think the double and triple taxing income through lotteries is not right, make everyone you know aware of this tax trick. The more people know, the more likely something will change.
- Prioritize tax planning. If you win the lottery, consider taking the annuity option and then move to a no-income-tax state. You won’t save in federal taxes, but it should save on some of the ongoing state tax obligation.
Playing the lottery can be fun, but having our government promote them as an opportunity to re-tax its everyday citizens is a questionable practice.