Why Keep or Discard Scratch-Off Lottery Tickets?

The decision of whether to keep or discard your scratch-off lottery tickets can have significant implications, especially when it comes to tax declaration. Understanding when it makes sense to keep your tickets can save you both trouble and potential tax disputes with the IRS.

Why Not Keep Every Ticket?

For smaller winnings, such as $5 or $10, it doesn't make sense to keep track of these tickets and declare the income to the IRS. It's a negligible amount, and even if you do report it, the IRS wouldn't demand any proof. They would simply trust your word that you received additional income that year.

For larger winnings, the lottery company will already report the transaction to the IRS, and you will have bank statements as proof of the deposit.

Strategic Ticket Management

When you win an amount large enough to report, it's advisable to keep the winning scratch-off ticket. However, this decision is predicated on how you plan to use these tickets.

If you plan to keep the ticket and not claim the money, this simplifies your tax situation. No tax is due, and you avoid the hassle of keeping records and potentially dealing with IRS scrutiny.

If you decide to claim the money, you must submit the ticket to the IRS and possibly pay taxes on the winnings. In this scenario, the losing tickets are of no benefit or use to you or the IRS, as they serve no purpose in offsetting your lottery income.

Even if you choose to keep the losing tickets, the Government can use them as evidence of your losses. This extends to finding these tickets in the trash, as any proof of your losses can be useful.

Potential IRS Scrutiny

The IRS is not blind to potential tax fraud, especially in the context of lottery winnings and gambling. If you attempt to claim large losses through your scratch-off tickets, the IRS may perform a cash audit of your transactions. They are aware that lottery and other forms of gambling are predominantly in cash, so keeping track of your expenditures and cash transactions is critical.

For instance, if you claim winning tickets worth $100K, the IRS may ask for detailed records to show matching cash withdrawals. If you have a collection of losing tickets totaling $30K, the IRS may demand to see evidence of these cash withdrawals, especially if they don't align with your regular spending patterns.

The risk of disallowing all the deductions or charging you with tax fraud is very real, considering the amount at stake. In the case of a $100K lottery win, even if you end up paying $40K in taxes, you can consider it as winning $60K tax-free. From a mathematical and legal standpoint, this is a safer and more practical alternative.

Conclusion

Whether to save the losing scratch-off lottery tickets or not depends on the gravity of the winnings and the potential tax implications. Large winnings in scratch-off lotteries justify the effort to keep the winning tickets to file your taxes appropriately. However, the losing tickets are unlikely to prove beneficial and may only complicate the process.