October 10, 2000
TAXATION OF WINNINGS IN OUT-OF-STATE LOTTERY
By: Judith Lohman, Chief Analyst
You asked (1) how Connecticut taxes out-of-state lottery winnings; (2) whether Connecticut taxes out-of-state winnings when the winner has already paid taxes in the other state and, if so, why; and (3) whether taxation of winnings in two states violates a federal prohibition against double taxation.
The Office of Legislative Research is not authorized to give opinions on the applicability of the tax laws to any particular case. This report provides information about the law but should not be considered legal or financial advice.
Connecticut's income tax is based on a taxpayer's federal adjusted gross income. Gambling winnings must be reported and included in a taxpayer's gross income for federal tax purposes and also counts for state income tax purposes. Federal and state withholding requirements on gambling winnings are the same.
A Connecticut resident must pay Connecticut income tax on out-of-state gambling winnings even if he also pays income taxes on the same winnings in the state where he won. Because the Department of Revenue Services does not consider gambling winnings to be derived from sources in any particular state, Connecticut residents cannot take a tax credit for income taxes they may pay in other states on out-of-state gambling winnings.
There is no federal statutory or constitutional prohibition against more than one state imposing taxes on the same income.
CONNECTICUT INCOME TAX ON GAMBLING WINNINGS
A Connecticut resident' s gambling winnings are subject to both state and federal income taxes regardless of where he wins. The Internal Revenue Service (IRS) requires the winner of any amount over $600 to fill out a Form W2G containing the winner's name, address, and Social Security number and details about the wager. The payer must send the copy of the form to the IRS. In addition, the payer must withhold 28% of any winnings over $5,000 for federal income taxes (IRS Tax Topic 419, Gambling Income and Expenses).
Connecticut's state income tax is based on a taxpayer's federal adjusted gross income. Thus, any income that is federally taxable (such as gambling winnings) is also taxable in Connecticut unless specifically exempted. Connecticut subjects the following winnings over $5,000 to mandatory withholding: (1) Connecticut lottery winnings if the winner is a Connecticut resident on the date of the winning drawing, (2) jai alai or dog track winnings paid to a winner who was a state resident on the date of the race or match, and (3) any other winnings paid by someone who has an office or does business in Connecticut to someone who was a Connecticut resident on the date of the wager or who receives winnings on behalf of a Connecticut resident (Conn. Agencies Regs., § 12-705(b)-2).
CREDIT FOR TAXES PAID IN ANOTHER STATE
By law, when a Connecticut resident is taxed in both Connecticut and another state on income “derived from sources” in the other state, he may take a credit against his Connecticut income tax for the amount he paid on that income in the other state (CGS § 12-704 (a)). But, according to Fred Clark of the Department of Revenue Services' Legal Division, the credit provision does not apply to out-of-state gambling winnings. The reason is that Connecticut does not consider winnings by someone who lives outside a state to be “derived from” the state where he wins. This rule applies both to a resident of another state who wins in Connecticut or a Connecticut resident who wins in another state (Conn. Agencies Regs., §12-704(a)(4), copy enclosed).
Since not every state treats nonresidents' gambling winnings this way, a Connecticut resident may have his winnings taxed twice. Depending on the other state's law, a Connecticut resident who wins an out-of-state lottery may have to pay tax in the other state as well as in Connecticut.
For example, a Connecticut resident who wins more than $2,000 in the Wisconsin state lottery or wins a multi-state lottery such as Powerball with a ticket bought from a Wisconsin retailer must file a Wisconsin income tax return and pay Wisconsin income tax (Wisconsin Department of Revenue, Individual Income Tax, Part-Year and Nonresidents). Like any other Connecticut resident, this winner would also owe Connecticut income tax on his winnings. He could not credit his Wisconsin tax payment against his Connecticut tax because, under Connecticut law, his winnings are not considered to be derived from sources in Wisconsin.
On the other hand, the same law benefits out-of-state gamblers who win in Connecticut. A Wisconsin resident who wins the Connecticut lottery would owe no Connecticut income tax because Connecticut does not consider his winnings to be derived from sources in Connecticut.
FEDERAL PROHIBITION ON “DOUBLE TAXATION”
There is no federal law that prohibits two states from taxing the same income. Nor does the U.S. Constitution prohibit so-called “double taxation.” As early as 1920, Justice Oliver Wendell Holmes ruled that the Constitution “no more forbids double taxation than it does doubling the amount of a tax” (Fort Smith Lumber Co. v. Arkansas, 251 US, 532 (1920)). The Connecticut Supreme Court restated the principle as recently as June 2000 (“ there [is] no constitutional principle that prohibit[s] mere double taxation . . .” Bell Atlantic Mobile, Inc. v. Department of Public Utility Control, 253 Conn. 453, 487).