The Lottery and State Taxes

Setting aside the near zero chances of winning a lottery like the Powerball, would you pay state income tax on the winnings if your numbers get drawn?

Most states specifically say that lottery winnings are subject to their state tax (i.e., the income is sourced to that state where the ticket is purchased). So if a Massachusetts resident buys a Connecticut lottery ticket, Connecticut would expect that resident to pay income tax on the winnings. Similarly, as a resident of Massachusetts the income would be included on the resident’s state income tax return, but the resident may get a credit for taxes paid to Connecticut.

States like New Hampshire represent an interesting lottery opportunity in that New Hampshire does not subject lottery winnings to a state income tax. In theory, someone could buy a New Hampshire ticket, win, and then move to New Hampshire before claiming the prize, thereby increasing the winnings by the state tax they would have otherwise paid. Surely Connecticut (or whatever state the winner leaves when moving to New Hampshire) would challenge such a change of residency, but with millions of dollars in state taxes on the table, it seems like a fight worth having.

So should New England residents make the trek to New Hampshire to buy their tickets? With the low odds of winning and the cost of gas, probably not, but if you are driving through New Hampshire anyway maybe you should spend that extra $2 while you are at the gas station.