For the first time since Pennsylvania introduced a state lottery in 1972, cash winnings are now taxable.

The law took effect with the 2016-17 budget last year, retroactive to Jan. 1, 2016. Winnings of more than $5,000 and prizes valued at $600 or more are subject to the state income tax of 3.07 percent.Neighboring states New Jersey and Delaware have been collecting state taxes on lottery winnings. All except two states do not collect taxes from nonresident winners, but they usually end up paying them to their home states. Maryland and Arizona tax nonresidents, but at a lower rate than residents.With lottery fever going over the moon last week because of a Powerball jackpot of $758 million, Pennsylvania, although not home to the sole winner, will still benefit from one $2 million and two $1 million winners. This will bring in $122,800 in state income tax that will be used primarily for programs benefiting senior citizens.If the sole winning ticket in the Aug. 23 drawing had been sold in Pennsylvania rather than Massachusetts, it would have resulted in the state collecting a little more than $28 million if the winner chose the 29-year annuity option.If the winner chose the lump-sum option, as most do, this would reduce the state's take to $16.3 million, based on a lump-sum payment of $440 million.States decide how to allocate lottery revenue. Education is the most common recipient of lottery taxes; Pennsylvania, however, is the only state that earmarks the taxes it gets from lottery winners for the elderly. In some states, the taxes go directly into the general fund.Last year, for example, Pennsylvania took in $1.3 billion from lotteries and spent about $900 million of it on programs for senior citizens. Wisconsin spends 99 percent of its lottery revenue to lower state property taxes. Minnesota sets aside about 25 percent of its lottery revenue to deposit into an environmental and natural resources fund.According to the Pennsylvania Department of Revenue, multistate lottery prizes, such as those from the Powerball and Mega Millions and purchased from a licensed state lottery ticket seller, are considered a prize awarded by the Pennsylvania State Lottery and are now taxed.The cost of buying lottery tickets on or after July 21, 1983, and before Jan. 1, 2016, cannot be deducted from winnings, but tickets purchased after Jan. 1, 2016 can be deducted from winnings received during the same tax year.This means, for example, that if you hit the lottery for $10,000, you can deduct the amount it cost you to buy lottery tickets in the same year as the win. If you have a $10-a-week outlay, you could deduct $520 from your winnings.This deduction also goes for the cost of lottery tickets bought in other states or countries or for other lotteries during a tax year.The Revenue Department says that taxpayers must maintain detailed records, and the burden of proof is on them to show that they are entitled to such a deduction.The Department warns, however, that no expenses attributable to gambling and lottery income are deductible. This includes parking, postage, entry fees, meals, lodging or travel.If you are a big winner, where you buy your ticket has consequences. Withholding taxes vary from zero in California and Delaware, where lottery winnings are not taxed, and states with no income tax, to 12 percent in New York City.Arizona and Maryland have withholding rates for nonresidents, so if you buy a ticket in nearby Maryland and it hits, you would face double withholding since you would also be taxed by Pennsylvania.States such as Pennsylvania rely heavily on lottery revenue and collect on average $58 per person in profit; this does not count the income tax payments winners make.So make no mistake about it, this is a tax which falls disproportionately on low-income individuals who are hoping against hope to hit the mother lode. (The odds of winning a Powerball jackpot are 292 million to 1.) The big winners when these jackpots hit stratospheric numbers are the states, whose total lottery sales came to $80 billion last year. State lotteries pay out an average of only 60 percent of gross revenues, compared to about 90 percent for casino slot machines or table games.By Bruce Frassinelli |

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