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Connect on LinkedInWinning the lottery feels like the universe just handed you a golden ticket—until the IRS shows up with scissors to take its cut.
Whether you cash out in a lump sum payment or spread your jackpot over annual payments, taxes on lottery winnings are unavoidable. Between federal rates (up to 37%) and state rules that vary wildly, the “dream come true” number on your ticket often looks very different from what ends up in your bank account.
The thrill is real—but so is the sobering reminder that every jackpot comes with a price tag.
📋 Key Updates for 2025
- Starting with tax years beginning January 1, 2026, gambling loss deductions will be capped at 90% of winnings, replacing the current 100% limit.
- The IRS has reaffirmed that all lottery winnings are fully taxable, and losses can only be deducted if you itemize and only up to the amount won.
- States continue to adjust their treatment of lottery winnings, with several (including New York and the District of Columbia) confirming higher withholding rates in line with 2025 brackets.
Are lottery winnings taxable income?
Lottery winnings are treated as gambling income under U.S. tax law, which means they must be reported as taxable income in the year you receive them. The IRS doesn’t distinguish between a small scratch-off prize and a multi-million-dollar jackpot—both count as income.
Key points for taxpayers:
- Not earned income: Winnings aren’t considered wages or self-employment income, so they don’t qualify for credits like the Earned Income Credit.
- Potential for a higher bracket: A large windfall can push you into a higher tax bracket, raising your overall liability.
- Effect on credits: Extra income may reduce or eliminate benefits such as the Child Tax Credit.
- Estimated tax payments: Significant prizes may require quarterly payments to avoid underpayment penalties.
- State rules differ: Some states, like Wyoming, have no state income tax, while others treat lottery winnings just like salary or investment income.
💡 Pro Tip:
Don’t assume a “net win” is the number on your oversized check. Factor in federal and state tax payments before making plans with your prize.
Federal taxes on lottery winnings
The IRS doesn’t wait politely for its share of your jackpot—it takes a cut right away. On large lottery prizes, 24% is withheld upfront for federal taxes. But that’s just the starting point: depending on your total income, the actual rate can climb as high as 37%.
Here’s how it works:
- Withholding applies immediately: Whether you take a lump sum or annual payments, 24% comes off the top before you see a dime.
- Top rates may apply later: If your winnings push you into the highest tax bracket, you’ll owe the difference when you file your return.
- Form W-2G issued: Lottery agencies provide this form so you can report the income on your federal tax return.
- Surprise tax bills happen: If not enough is withheld, the balance comes due at filing time—and can wipe out any refund you thought you’d get.
💡 Pro Tip:
Winning the lottery doesn’t automatically mean you’re set for life. Plan ahead for that April tax bill—otherwise the IRS may come back for a second bite of your prize.
State and local taxes on lottery winnings
The tax bite doesn’t stop at the federal level—your state (and sometimes your city) may want in on your jackpot too. Rules vary widely, and the difference between states can mean thousands—or millions—more in taxes.
- No-tax states: Places like New Hampshire, Florida, and Texas don’t impose state or local taxes on lottery winnings.
- High-tax states: In New York, Maryland, and the District of Columbia, withholding generally ranges roughly from 8% to about 11% on top of federal tax.
- Location matters: Where you bought the ticket and where you live both affect your income tax return. In some cases, you may owe taxes in more than one state.
💡 Pro Tip:
Don’t assume your entire prize is safe once federal taxes are withheld. State rules can shrink your tax refund—or create an unexpected bill—depending on where you call home.
Lump sum vs. annuity payments
After you win the lottery, one of the biggest choices is how to take the prize: all at once or spread over time.
- Lump sum payout: You get the cash immediately, but it’s all taxed in a single year at your highest rate—which usually means hitting the top tax bracket.
- Annuity payments: The prize is spread out over decades, which can reduce your yearly tax liability and provide a steady income stream.
Which option makes sense depends on more than just taxes. Investment opportunities, retirement goals, and even how it interacts with Social Security should factor in. That’s why many winners sit down with a tax expert before making the call—because once you choose, there’s no going back.
💡 Pro Tip:
Don’t focus only on the headline number. The structure of your payout can shape both your tax bill and your long-term financial security.
How much do you really keep after taxes?
The number on your lottery ticket isn’t what lands in your bank account. Between federal withholding, top tax brackets, and state income tax, the final figure can look very different.
For example, a $1 million jackpot might leave around $600,000 after federal and state taxes—less if you live somewhere with high rates like New York. Mega jackpots like Powerball are even more dramatic: the bigger the win, the faster those top brackets and state cuts eat into it.
Many filers turn to online tax calculators to estimate the real payout before making big plans. It’s not as exciting as dreaming about yachts and mansions, but it does keep you from committing to champagne tastes on a beer budget.
💡 Pro Tip:
Before you celebrate, run the math—or have a tax professional do it. Knowing your after-tax winnings can save you from overpromising to friends, family, or yourself.
Reporting lottery winnings on your tax return
Lottery prizes don’t just show up as a footnote—they have to be reported in full on your income tax return. The IRS treats them like any other gambling winnings, and they’re reported under “other income” on Form 1040.
Here’s what to keep in mind:
- Report all gambling winnings, not just lottery tickets. Casinos, raffles, and sports betting all go in the same category.
- Itemized deductions for gambling losses are allowed, but only up to the amount of your winnings.
- Accurate reporting is critical—missing or misreporting can trigger IRS penalties, especially since lottery agencies issue Form W-2G for big prizes.
💡 Pro Tip:
Keep every receipt, losing ticket, and record of play. If you want to deduct losses against your winnings, documentation is the only way the IRS will take it seriously.
Managing taxes on lottery winnings
Winning the lottery can change your life overnight—but without planning, it can also change your tax bracket in ways you didn’t expect. Careful strategy helps you keep more of your prize and avoid surprises at filing time.
- Deduction choices: Lottery winnings increase your taxable income, which makes it especially important to evaluate whether the standard deduction or itemizing (such as for mortgage interest, medical expenses, or charitable giving) gives you the bigger tax benefit.
- Mind your timing: Large prizes added to an already high-income year can push you into the top federal bracket. Some winners coordinate other transactions—like selling investments or deferring income—so they don’t pile everything into the same tax year.
- Plan for shortfalls: The IRS withholds 24% upfront, but the top federal rate is 37%. That gap alone can leave a massive balance due in April if you don’t plan ahead, and state taxes may make the shortfall worse.
- Get expert help: A CPA or tax professional can guide lottery winners on structuring their finances after a windfall, from setting aside funds for estimated payments to planning long-term strategies for retirement, Social Security, and even estate taxes.
💡 Pro Tip:
Don’t treat your winnings like ordinary income. Tax planning after a jackpot is its own category—one that requires foresight and, ideally, professional guidance if you want your prize to last.
Turning luck into lasting wealth
Winning the lottery is thrilling, but taxes on lottery winnings can quickly shrink that oversized check. Between federal withholding, state rules, and higher tax brackets, careful planning is what turns a lucky break into long-term security.Want more smart, no-nonsense insights on taxes, money, and life abroad? Subscribe to the Bright!Tax newsletter—your monthly guide to staying one step ahead of the IRS (and keeping more of what’s yours).
Frequently Asked Questions (FAQs)
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What tax rate applies to lottery winnings?
Lottery winnings are subject to federal income tax at rates up to 37%, depending on your total tax liability for the year.
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How does the IRS handle tax withholding on a winning ticket?
For large prizes, the IRS requires 24% tax withholding upfront. If your actual federal income tax rate is higher, you’ll owe the difference when you complete your tax filing.
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Are lottery winnings taxable for nonresidents?
Yes. Nonresidents who win U.S. lotteries must pay federal income tax, often at a flat 30% rate, and may face additional state taxes depending on where the ticket was purchased.
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Can I claim tax deductions against lottery winnings?
You can deduct gambling losses, but only if you itemize and only up to the amount of your winnings. Other tax deductions, like charitable giving or mortgage interest, may also help reduce your total tax bill.
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How do I report tax lottery winnings on my return?
Report all winnings as “other income” on Form 1040. The lottery agency will issue Form W-2G for large prizes, which you’ll use when completing your tax filing.
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Do I still owe taxes if I already had withholding?
Maybe. The 24% federal withholding on a winning ticket is just a starting point—many winners end up owing more once their total tax is calculated.
