Yes, in a practical sense you do pay taxes twice on lottery winnings, and sometimes more than twice. The federal government, most state governments, and a handful of cities each tax the same prize independently, so a single jackpot can move through two or three separate tax bills before you keep what’s left. A few situations, like giving money to family or leaving annuity payments to heirs, can create a genuine second tax on the same dollars.
The Layers of Tax on a Single Prize
Lottery winnings are treated as ordinary income by the IRS, reported as other income rather than wages.1Internal Revenue Service. Publication 525, Taxable and Nontaxable Income Most states then apply their own income tax on top, with rates ranging from under 3% to over 10%. A handful of cities add a third layer of local income tax on residents, which can run from 1% to nearly 4%.
Each level of government taxes your prize on its own terms. Federal withholding does not reduce what the state claims, and state tax does not offset what you owe the IRS. Roughly a dozen states either have no income tax or specifically exempt lottery prizes, but everywhere else the stacking is real. That stacking is the reason winners feel they’ve been taxed multiple times on one event.
Why the 24% Withheld Is Not the End of It
When you claim a prize over $5,000, the lottery commission withholds 24% for the IRS before you see the money.2Office of the Law Revision Counsel. 26 U.S. Code 3402 – Income Tax Collected at Source Treat that as a down payment, not the final bill. The top federal bracket for 2026 is 37%, which applies to taxable income above $640,600 for single filers and $768,700 for married couples filing jointly.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Any jackpot large enough to reach that bracket leaves roughly a 13-point gap between what was withheld and what you owe.
To close that gap without a penalty, most winners have to make estimated tax payments. The IRS generally requires them if you expect to owe at least $1,000 after withholding and your withholding covers less than 90% of your current-year tax or 100% of last year’s (110% if your prior-year adjusted gross income exceeded $150,000).4Internal Revenue Service. Form 1040-ES, Estimated Tax for Individuals A large win almost always triggers this. Miss the deadlines and interest applies at the IRS underpayment rate, which is 7% for early 2026.5Internal Revenue Service. Quarterly Interest Rates One good thing: because lottery income is not wages, it is not subject to Social Security or Medicare payroll taxes.1Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
Lump Sum or Annuity: Does the Annuity Get Taxed Every Year?
How you take the prize changes when you pay, not whether. A lump sum is taxable in one year and almost certainly puts you in the top federal bracket. The annuity spreads the prize across roughly 30 annual payments, and each payment is taxed as ordinary income in the year you receive it.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses
The annuity can feel like you’re being taxed on the same prize over and over. You aren’t. Each installment is a separate piece of income, taxed once at whatever rate applies that year. The trade-off is that you’re locked into future rates. If federal or state rates rise during the payout period, your later checks face higher tax than your earlier ones.
If You Die During the Annuity
Unfinished annuity payments pass to your beneficiaries as income in respect of a decedent. Your heirs pay income tax on each payment they receive, and they don’t get a stepped-up basis to soften it. If the value of the remaining annuity is also large enough to be included in your taxable estate, the same stream of payments can face both estate tax and income tax, though a federal deduction offsets some of the overlap.7Internal Revenue Service. Revenue Ruling 2005-30
Sharing the Prize: The Real Double Tax
Giving away part of your winnings after you claim them is where “taxed twice on the same dollars” stops being a feeling and becomes literal. You pay income tax on the full prize. Then, if you hand money to friends or family, the federal gift tax may apply on top.8Office of the Law Revision Counsel. 26 U.S. Code 2501 – Imposition of Tax For 2026, you can give up to $19,000 per recipient per year without filing a gift tax return.9Internal Revenue Service. Frequently Asked Questions on Gift Taxes Amounts above that count against your lifetime exemption of $15,000,000 per person.10Internal Revenue Service. Whats New – Estate and Gift Tax
Lottery Pools and Form 5754
If the ticket actually belonged to a group before the drawing, you can avoid the gift-tax trap entirely. The person who claims the prize files IRS Form 5754, listing each member’s name, taxpayer identification number, and share of the winnings.11Internal Revenue Service. Form 5754 The lottery commission then issues each member a separate Form W-2G, and each person reports only their portion as income.12Internal Revenue Service. Instructions for Forms W-2G and 5754 Without this documentation, the IRS can treat the whole prize as one person’s income and every payout to the other members as a taxable gift. A written pool agreement signed before the drawing, kept alongside the ticket receipt, is the strongest protection.
Higher Medicare Premiums Two Years Later
A jackpot can raise your Medicare premiums through the income-related monthly adjustment amount, or IRMAA. Medicare uses your modified adjusted gross income from two years prior to set Part B and Part D premiums, so a win in one year can mean higher premiums two years later. At the highest income tier, the total monthly Part B premium reaches $689.90, and Part D adds up to $91.00 on top.13CMS. 2026 Medicare Parts A and B Premiums and Deductibles Take the annuity, and elevated premiums can recur every year the payment keeps your income above the IRMAA thresholds.
Offsetting Winnings With Gambling Losses
Gambling losses can reduce the tax on gambling winnings, but only if you itemize on Schedule A and only up to the amount of gambling income you reported.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses You cannot push winnings below zero, and you cannot claim the deduction if you take the standard deduction. For most jackpot winners, documented losses are tiny next to the prize, so the practical value is limited. Regular gamblers with substantial records may see a meaningful reduction.
If You Are Not a U.S. Resident
Foreign nationals who win a U.S. lottery face a flat 30% federal withholding, higher than the 24% for U.S. residents.12Internal Revenue Service. Instructions for Forms W-2G and 5754 Nonresident aliens report U.S.-source gambling winnings on Form 1040-NR, and those who are not residents of Canada generally cannot deduct gambling losses against those winnings.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses A tax treaty between the U.S. and the winner’s home country may reduce or eliminate the withholding, so it’s worth checking before claiming a prize.