Winning the lottery can be an exciting event that changes someone’s financial situation dramatically. However, for those receiving Social Security benefits, a big lottery prize can also affect eligibility for Social Security payments.
Does winning the lottery affect your Social Security benefits?
Yes, receiving a large sum of money from lottery winnings can affect your Social Security benefits. Social Security looks at all sources of income, including lottery and gambling winnings, when determining whether you still qualify for benefits.
Lottery winnings as income
The Social Security Administration (SSA) considers lottery winnings as income received in a single year. This means if your lottery winnings exceed certain income thresholds, your benefits may be reduced or eliminated.
For example, if you receive Social Security disability benefits or Supplemental Security Income (SSI), those benefits are needs-based. Your eligibility depends on having minimal income and assets. Even a modest lottery prize could potentially put you over the stringent income and resource limits for these programs.
Impact on retirement benefits
For Social Security retirement benefits, the impact depends partly on when you receive the lottery payout. If you win the lottery before applying for retirement benefits, your future Social Security checks may be smaller. Social Security benefit amounts are based on your highest 35 years of earnings. Lottery winnings could boost your earnings for the year you receive the payout.
If you already receive Social Security retirement benefits, a significant lottery prize could reduce your payments. Social Security counts all sources of income when recalculating your benefits each year.
How lottery winnings are calculated by Social Security
Lottery and gambling winnings are considered “unearned” income by the SSA. This means you did not actively work to earn the money.
Counting lump-sum payments
If you receive a single lump-sum lottery payout, Social Security will count the entire amount as income for the year you received the winnings. The agency does not consider when you purchased the ticket or how long it took to accrue the winnings.
For example, if you win a $100,000 lottery prize in 2023, SSA will count the full $100,000 as 2023 income. It does not matter if you bought the lucky ticket in 2021 or 2022.
Payouts over multiple years
In some cases, lottery winners can choose to receive their full prize in annual installments over many years. With this option, each year’s payout will be counted as income for that specific year.
For example, if you win a $500,000 lottery jackpot and elect to receive $50,000 payouts annually over 10 years, SSA will count $50,000 as your income in each of those 10 years. The previous or future annual payments do not get counted.
How much lottery winnings are allowed on Social Security?
The amount of lottery winnings you can receive while retaining Social Security benefits depends on which program you are enrolled in.
SSI and SSDI
For SSI and SSDI, income limits are very strict. In 2023, the basic SSI monthly payment is a federal benefit of $914 for an individual or $1,371 for a couple. You can generally only receive SSI if you have $2,000 or less in countable resources (such as cash, bank accounts, etc.).
With SSDI, your disability status is reviewed if you engage in “substantial gainful activity” defined as earning over $1,470 per month for 2023.
Any significant lottery winnings would likely disqualify you from SSI or SSDI unless you quickly spent down or sheltered the money.
Retirement benefits
With Social Security retirement benefits, there is no absolute income cutoff. However, your benefits can be reduced if income from all sources exceeds certain thresholds.
In 2023, if your provisional income exceeds $32,194 ($44,232 for couples), your benefits may be taxed. Provisional income includes adjusted gross income, nontaxable interest, and 50% of your Social Security benefits. Above $44,232 ($66,348 for couples), up to 85% of benefits are taxed.
Lottery winnings are counted as income, so large payouts can trigger this “income tax” on your Social Security retirement checks.
Strategies to reduce the impact of lottery winnings
If you are receiving Social Security and win a large lottery prize, here are some strategies that may help minimize the impact on your benefits:
Delay claiming winnings
Consider delaying claiming lottery winnings until after you apply for Social Security if you have not done so already. This prevents the lump-sum payment from inflating your highest 35 years of earnings. If you’ve already claimed Social Security, delaying can push the winnings into a future tax year.
Invest lump-sum payments
Instead of receiving a single large payout, invest the lump sum and live off the investment income. This spreads taxes on the winnings over many years and may reduce the impact on your Social Security benefits.
Use special needs trusts
If receiving SSI or SSDI, a special needs trust allows you to shelter assets so you remain below the very low eligibility limits. The trust manages the assets for your benefit.
Purchase exempt assets
Certain assets do not count against SSI/SSDI eligibility, like a home, vehicle, burial plots, etc. You may want to use a portion of your winnings to purchase exempt assets you can still benefit from.
Claiming prizes anonymously
Some lottery winners can claim their prizes anonymously by setting up a trust or limited liability company to receive the money on their behalf. This helps keep their identity private. However, it does not change how the SSA calculates lottery winnings for eligibility. The agency still counts the money as your income for that tax year.
An anonymous claim just means the lottery commission publicly lists the winner as the name of the trust rather than your actual name. It does not prevent the SSA from viewing your lottery winnings.
Paying taxes on lottery winnings
Lottery winnings are generally subject to both federal and state taxes. The top federal tax rate is 37% for 2022 and 2023. State taxes vary but can be as high as 8% or more of the prize amount.
Taxes are withheld immediately for prizes over $5,000. You will need to pay any additional taxes owed when you file your tax return for the year you received the winnings.
| Prize Amount | Federal Tax Withholding Rate |
|---|---|
| $5,000 or less | 24% |
| $5,001 to $10,000 | 24% |
| $10,001 to $20,000 | 24% |
| $20,001 to $100,000 | 37% |
| $100,001 to $390,000 | 37% |
| $390,001 to $1,160,000 | 37% |
| Over $1,160,000 | 37% |
State taxes vary significantly but often range from about 4 – 8% of lottery winnings. Some states like Florida, Texas, and others with no income tax do not tax lottery winnings.
Notifying Social Security about lottery winnings
You are required to report any change in income to the Social Security Administration, including any lottery or gambling winnings. The SSA will eventually find out about large prizes from IRS reporting. However, it’s best to be proactive and notify them yourself.
Failing to report income sources like lottery winnings can be considered SSI fraud or similar misconduct if you continue receiving full benefits.
To report lottery winnings or other changes in income, contact your local Social Security office. You can call SSA at 1-800-772-1213 or visit www.ssa.gov to find a nearby office.
Appealing benefit reductions
If your Social Security benefits are lowered or terminated due to lottery winnings, you do have appeal rights. You can request an appeal within 60 days of being notified of the adverse action.
The appeal process has several levels:
- Reconsideration by the SSA office that made the initial decision
- Hearing before an Administrative Law Judge
- Review by the Appeals Council
- Federal court appeal
At each stage, present evidence why your benefits should be reinstated or minimally reduced. For example, show how lottery winnings have been spent down or sheltered in exempt assets. Having an attorney to represent you can be very helpful throughout the appeals process.
Gambling winnings and Social Security
Gambling winnings from casinos, horse racing, or other venues are treated very similarly to lottery prizes by Social Security. Any lump-sum payouts or annual gambling winnings exceeding Social Security income limits can affect your eligibility and payment amounts.
However, smaller periodic gambling winnings of a couple hundred dollars are less likely to impact benefits. Make sure to report all gambling winnings and losses accurately on your taxes each year.
Conclusion
While winning the lottery may seem like a financial windfall, the impact on eligibility for Social Security benefits is an important consideration. SSI and SSDI recipients with substantial lottery or gambling winnings often lose benefits quickly unless the money can be spent or sheltered. For Social Security retirement benefits, large prizes can trigger income taxes on benefits or eliminate payments entirely depending on total income from all sources.
If you receive SSA benefits and come into significant lottery winnings, be sure to consult with the agency right away to understand the consequences. Financial strategies like special needs trusts and purchasing exempt assets may help if structured properly before claiming a lottery prize.
