Lottery winnings are not taxed twice in any legal sense, but the way the money reaches you makes it feel that way. The lottery agency withholds 24% for federal tax before handing over your prize, and then you owe a second, larger payment when you file your return. That second payment is not a separate tax. It is the balance due on a single federal obligation where the upfront withholding fell short of your actual rate. On top of that, most states levy their own income tax on the prize, and a few cities add a local tax, but each of those is a different government exercising its own authority over income received in its jurisdiction.
Why the 24% Withholding Feels Like a Second Tax
When you claim a lottery prize over $5,000, the lottery agency withholds 24% for federal income tax before cutting you a check.1Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026) This is required by federal law.2Office of the Law Revision Counsel. 26 USC 3402(q) – Extension of Withholding to Certain Gambling Winnings Think of it the way you think of withholding from a paycheck: it is a prepayment toward your final bill, not the bill itself.
The IRS treats lottery prizes as ordinary income, in the same category as wages.3Internal Revenue Service. Topic No. 419, Gambling Income and Losses Under federal law, gross income includes “all income from whatever source derived,” which sweeps in lottery winnings even without listing them by name.4Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Because the prize is ordinary income rather than a capital gain, no preferential rate applies. Federal brackets for 2026 top out at 37% for single filers with taxable income above $640,600 and joint filers above $768,700.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Any headline-sized jackpot pushes the winner well past those thresholds, so most of the prize is taxed at the top rate.
Here is where the second-tax feeling comes from. Win a $10 million jackpot and take the lump sum, and the lottery withholds roughly $2.4 million at 24%. But your actual federal rate on that income is 37%, so you owe about $3.7 million. The remaining $1.3 million is due when you file your return. Writing that second, larger check to the IRS feels like paying twice, but the arithmetic tells a different story: one federal tax, split into a prepayment and a balance.
The lottery agency issues you a Form W-2G documenting the prize and the amount withheld, and the IRS gets a copy too.6Internal Revenue Service. Gambling Income and Expenses Lottery income doesn’t fly under the radar.
Federal, State, and Local Are Separate Governments
Federal tax is only one layer. Most states impose their own income tax on lottery winnings, with rates ranging from under 3% to nearly 11%. About eight states either have no income tax or specifically exempt lottery prizes, so a winner in one of those states keeps noticeably more of the jackpot than someone in a high-tax state. On a $100 million prize the geography alone can shift the outcome by more than $10 million.
A handful of cities also levy local income taxes on top of the state and federal layers. Local rates are typically modest, a few percentage points at most, but they represent another deduction from your net payout.
Paying federal, state, and local tax on the same prize is not double taxation in any legal sense. Each taxing authority operates under its own legal power. Three separate governments each exercising their independent right to tax income earned within their jurisdiction is not the same as one government taxing the same dollar twice.
What Happens If You Buy the Ticket in Another State
Multi-state games create a wrinkle. If you buy a winning ticket outside your home state, the state where you bought it may withhold state tax at the source, and your home state will still expect you to report the winnings on your resident return. On the surface that looks like two states taxing the same money.
In practice, most states prevent that outcome through a credit for taxes paid to another jurisdiction. When you file your home-state return, you claim a credit equal to the tax already paid to the state where the ticket was sold. If your home state’s rate is higher, you pay only the difference. If it is lower, you don’t get a refund of the excess paid to the other state, but you won’t owe your home state anything additional. You never pay the full rate to both states on the same dollar, though the paperwork requires filing a nonresident return in the ticket state and a resident return at home.
Only a couple of states withhold tax from out-of-state lottery winners at all. In the rest, you deal with your home state’s tax authority directly. If you live in a state with no income tax and buy a ticket in another state that also doesn’t tax lottery winnings, the only tax you face is federal.
Covering the Shortfall Before the April Bill
The 24% withholding doesn’t necessarily satisfy the IRS’s estimated tax rules for the year. If you owe more than $1,000 beyond what was withheld and you don’t make estimated payments, the IRS charges an underpayment penalty on top of what you already owe.7Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty For a multimillion-dollar jackpot, the gap between 24% withholding and a 37% actual rate is exactly the kind of shortfall that triggers this penalty.
You can avoid the penalty by making quarterly estimated payments using Form 1040-ES. The IRS divides the year into four payment periods:8Internal Revenue Service. When Are Quarterly Estimated Tax Payments Due – Individuals
- January 1 through March 31: payment due April 15
- April 1 through May 31: payment due June 15
- June 1 through August 31: payment due September 15
- September 1 through December 31: payment due January 15 of the following year
The safe harbor rule gives you two ways to stay penalty-free. Pay at least 90% of your current-year tax liability through withholding and estimated payments, or pay 100% of what you owed the prior year. If your adjusted gross income last year exceeded $150,000, that second threshold rises to 110%.7Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty For most winners, the prior-year safe harbor is the easier route because your previous tax bill was likely a fraction of what you’ll owe this year. Making a single large estimated payment in the quarter you receive the prize is the simplest way to handle it.
Sharing the Prize Is a Different Tax Question
One boundary worth flagging: if you plan to hand some of the money to family or friends, you are not still inside the income tax question. Gifts sit under the federal gift tax. In 2026 you can give up to $19,000 per recipient per year without filing a gift tax return, and married couples can combine their exclusions to give $38,000 per recipient.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Anything above that counts against a lifetime exemption of $15,000,000 per individual.9Internal Revenue Service. What’s New – Estate and Gift Tax The trap most winners walk into is an informal group ticket: if one person claims the prize and then distributes shares, the IRS may treat each distribution as a taxable gift from the claimant. Groups that buy tickets together should document the arrangement in advance and have each member sign the claim form.