J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

11.2 Lottery and Sweepstake Winnings

Sweepstake, lottery, and raffle winnings are taxable as “other income” on Line 21 of Form 1040. The cost of tickets is deductible only to the extent you report winnings, and only if you itemize deductions rather than claim the standard deduction. If you itemize on Schedule A, a deduction for the cost of tickets may be claimed on Line 28 as a miscellaneous deduction that is not subject to the 2% adjusted gross income (AGI) floor (19.1). For example, if you buy state lottery tickets and win a 2012 drawing, you may deduct on Schedule A the cost of your losing tickets in 2012 up to the amount of your winnings.

When a minor wins a state lottery and the prize is held by his or her parents as custodians under the Uniform Transfers to Minors Act, the prize is taxed to the minor in the year the prize is won.

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Court Decision

Assignment of Future Lottery Payments

Courts have agreed with the IRS that a lump sum received for assigning the rights to future state lottery payments is taxed as ordinary income, not capital gain. The right to receive annual lottery payments is not a capital asset.

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Installment payments.

If lottery or sweepstakes winnings or casino jackpots are payable in installments, you pay tax only as installments are received. If within 60 days of winning a prize you have an option to choose a discounted ...