The Internal Revenue Service considers all lottery winnings to be taxable income, even if you do not receive an income document at the end of the year that reports the amount you’ve won. If you’ve split your prize with another person or group of people, you need to take steps to ensure any reportable amounts are allocated correctly between yourself and the other winners. In most cases, you need to handle these steps prior to cashing in on your prize.
State Lottery Regulations
Each state lottery commission creates its own rules concerning group or multiple lottery prize winners. The IRS sets mandatory withholding tax rules for prize amounts, but states decide the types of games and winning amounts that are applied to split claims. Before you cash in your winning ticket, download a winner’s handbook from the state lottery commission’s website to review your options.
The state lottery commission processes requests for multiple winner claims. Many states, such as California, Pennsylvania and Kansas require that split claims, be processed before the winning lottery prize is paid out. Other states, such as Oregon, require one claimant to receive the payout, then file a request with the lottery commission to divide the tax liability among the other winners. In either case the lottery commission gathers information about the winners and the amount of prize each person should receive before payments are arranged. The commission also uses claimant information to prepare the correct tax reporting information for each winner. Because each state lottery commission operates individually and may have varying rules, it is important to review the claim instructions for multi-winner claims prior to requesting a payout.
IRS Form 5754
When lottery prize splits are allowed by the state and a proper claim is submitted with the claims department, the lottery commission asks you to complete IRS Form 5754. This form must contain information about all the winners and the amount of prize each person received. This form is not turned into the IRS; the lottery commission uses it to prepare a W2-G form for each winner, listing the prize each person receives. W2-G forms are sent to winners by the end of January each year, and the IRS expects each person to report the amount of his prize as shown on the W2-G form.
In general the IRS only requires you to report income that is yours. If lottery winnings you receive are split with other winners and you are the only person who receives a W2-G form, which shows the entire taxable portion of the lottery prize, the IRS expects you to report the whole prize on your return. If this happens and the winnings were really split between you and other winners, you have the option of reporting only your portion. If you do this, you also need to attach a statement to your return explaining that you only received a portion of the prize. On your statement, you need to list the amount you received and provide information about the other winners who received part of the winnings as well as the amounts they received. The IRS then checks the returns of the other people to see if they also claimed their portions. If the other winners do not report their prize, the IRS may require you to claim the whole amount, as shown on the W2-G form you receive.