Taxes on US Lottery Winnings for Foreigners

For a foreign national, winning a United States lottery prize introduces a unique set of U.S. tax obligations. The process is more complex than collecting the full jackpot, as U.S. tax laws have specific provisions for income earned by non-U.S. persons. Understanding the immediate tax withholding, potential tax treaty benefits, separate state-level taxes, and final filing requirements is necessary for any foreign winner to navigate their financial responsibilities correctly.

Immediate Federal Tax Withholding

The first financial consequence for a non-U.S. person winning a U.S. lottery is an automatic deduction for federal taxes. Before the winner receives any money, the lottery agency or payer is required by U.S. law to withhold a portion of the gross winnings. The default withholding tax rate for a nonresident alien is a flat 30% of the total prize money, which applies to the gross amount.

To properly execute this withholding, the lottery winner must provide specific documentation to the prize payer. The primary document is Form W-8BEN, which officially certifies the winner’s status as a non-U.S. person to the entity paying the winnings. This form is obtained from the payer or the Internal Revenue Service (IRS) website and must be submitted to the payer, not the IRS.

After the tax year concludes, the winner will receive Form 1042-S from the payer. This form serves as an official record for both the winner and the IRS, detailing the total amount of the lottery winnings and the exact amount of federal tax that was withheld. This information is required for any subsequent tax filings the winner may need to make.

The Role of Tax Treaties

While the 30% federal withholding is the default rule, it is not always the final tax liability. The United States maintains income tax treaties with numerous countries, which are designed to prevent double taxation and clarify taxing rights. For a foreign lottery winner, the provisions within the treaty between their home country and the U.S. can significantly alter the amount of tax they ultimately owe.

Many of these treaties contain a specific article addressing “Gambling Winnings,” which can reduce or even eliminate the U.S. federal tax. For example, tax treaties with countries like the United Kingdom, Germany, France, Japan, and South Africa exempt their residents from U.S. tax on gambling winnings. In contrast, residents of countries without a favorable treaty provision, such as Brazil, China, and India, remain subject to the full 30% tax.

Even when a favorable tax treaty exists, the lottery agency may still be required to withhold the standard 30% tax when the prize is paid. The treaty benefit is not applied automatically at the point of payment. Instead, the winner must claim the benefit retroactively by filing a U.S. tax return to seek a refund.

State and Local Tax Obligations

Beyond the federal government, another layer of taxation can apply at the state and sometimes local level. These taxes are entirely separate from federal obligations and are determined by the laws of the state where the winning lottery ticket was purchased. The tax treatment of lottery winnings varies significantly from one state to another.

Some states, such as Florida and Texas, do not levy a personal income tax and impose no additional tax on lottery winnings. Other states, like California, have an income tax but specifically exempt state lottery winnings from it. However, many other states, including New York and Arizona, do tax lottery winnings as income, and these rates can be substantial.

It is important to note that U.S. income tax treaties do not apply to state and local taxes. The provisions that might eliminate the 30% federal tax have no bearing on the taxes imposed by a state. This means a winner from a treaty country like the U.K. could be fully exempt from federal tax but still owe a significant amount of tax to the state where the ticket was bought.

Filing a U.S. Tax Return

To reconcile their final U.S. tax liability and claim a refund, a foreign lottery winner must file a U.S. tax return. This requires first obtaining a proper identification number from the IRS. Since non-U.S. persons are not eligible for a Social Security Number, they must apply for an Individual Taxpayer Identification Number (ITIN), which is a nine-digit tax processing number.

The application for this number is made using Form W-7. The Form W-7 is submitted to the IRS at the same time as the filer’s first tax return. The application requires the winner to provide documentation that proves their identity and foreign status, with a valid passport being the most common document used.

The tax return itself is filed on Form 1040-NR. This is the document used to report the lottery winnings to the IRS, formally claim any applicable tax treaty benefits, and request a refund for any taxes that were over-withheld. For instance, if the full 30% was withheld but the winner’s country has a treaty exempting the winnings, Form 1040-NR is the vehicle to claim that exemption and ask for the withheld 30% back.

Once the Form 1040-NR and the accompanying Form W-7 application are submitted, the IRS will review the claim. If the return is accepted and shows that the tax withheld exceeds the actual tax owed, the U.S. Department of the Treasury will issue a refund check for the difference.