Lottery winnings are taxed as ordinary income under federal law, the same as wages or business profits. Any prize over $5,000 has 24% withheld automatically for federal tax,1Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source but a large jackpot usually lands the winner in the 37% top bracket, so the withholding covers only part of the actual bill. State and local taxes can add anywhere from 0% to about 13% on top of that, and the payout option you pick, whether you claim as a group, and whether you share money with family all change what you keep.
Federal Tax on the Prize
The 24% the lottery holds back is a deposit, not the final tax. For 2026, the top federal rate of 37% applies to taxable income above $640,601 for single filers and above $768,701 for married couples filing jointly.2Internal Revenue Service. Federal Income Tax Rates and Brackets A multimillion-dollar prize pushes almost the entire amount into that bracket, leaving a gap of roughly 13 percentage points between what was withheld and what is owed.
On a $10 million prize, that gap alone is about $1.3 million the winner still owes at filing time. Set the money aside, or make estimated payments during the year, or expect underpayment penalties layered on top of the tax.
State and Local Taxes
Most states also tax lottery winnings at their standard income tax rates, which run from under 3% to over 10%. A handful of states charge nothing because they have no state income tax, and at least one state with an income tax specifically exempts lottery prizes by statute. Roughly a dozen states in total either have no income tax or do not apply it to lottery winnings.
Some major cities pile on a local income tax as well. In certain metro areas, combined state and city tax on a jackpot can reach 12% to 13%. Two people winning the same national drawing can walk away with very different amounts based only on where they live.
If you buy the winning ticket outside your home state, expect tax exposure in both places. The state of purchase typically withholds its own tax, and your home state will still require you to report the income. Most states offer a credit for taxes paid to another state, so the same dollars are not usually taxed twice, but the paperwork and cash-flow timing can be messy.
Lump Sum or Annuity
Every major lottery gives winners a choice: a reduced cash lump sum now, or the full advertised jackpot paid in annual installments, typically 30 payments over 29 years. The tax result is very different.
A lump sum dumps everything into a single tax year. For any prize above a few million dollars, essentially the whole payout hits the 37% bracket. You get the capital in hand and can invest it, but you absorb the heaviest tax hit up front.
Annuity payments spread the income out, so you pay tax only on what you actually receive each year. Whether that keeps you in a lower bracket depends on the jackpot size and your other income. A $200 million prize still pays out enough each year to trigger the top rate. A $5 million prize on annuity could land in a noticeably lower bracket. The annuity also gives you a built-in hedge if federal rates fall in later years.
Reporting Your Winnings
The lottery agency reports every qualifying payout to you and to the IRS on Form W-2G, showing the total won and any federal tax already withheld.3Internal Revenue Service. Form W-2G – Certain Gambling Winnings For 2026 payments, the reporting threshold on Form W-2G for gambling winnings is $2,000.4Internal Revenue Service. Instructions for Forms W-2G and 5754 The mandatory 24% withholding still only applies to lottery prizes above $5,000.5Internal Revenue Service. Instructions for Forms W-2G and 5754
You report all gambling winnings on Schedule 1 of Form 1040, whether or not a W-2G was issued.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses That includes small scratch-off wins and any drawing prizes during the year. Withholding already reported on your W-2G is credited against your total tax, and the return determines whether you owe more or get a refund.
Estimated Tax Payments After a Big Win
Because 24% withholding almost never covers the full bill on a major prize, the IRS expects you to make an estimated tax payment for the quarter in which you received the money. The quarterly deadlines are:
- January through March income: payment due April 15
- April through May income: payment due June 15
- June through August income: payment due September 15
- September through December income: payment due January 15 of the following year
If a deadline falls on a weekend or holiday, the payment is due the next business day.7Internal Revenue Service. Estimated Tax
To avoid underpayment penalties, your total payments for the year (withholding plus estimated payments) must cover at least 90% of your 2026 tax liability or 100% of the tax on your 2025 return, whichever is smaller. If your 2025 adjusted gross income exceeded $150,000, that prior-year safe harbor rises to 110%.8Internal Revenue Service. Estimated Tax for Individuals For a first-time jackpot winner whose prior year was modest, the 100% or 110% of prior-year tax is often the easier safe harbor to hit. The safest move is still to estimate the full tax on the prize and pay it in the quarter you claim. The IRS charges interest on underpayments at a rate that has recently hovered around 6% to 7% annually.9Internal Revenue Service. Quarterly Interest Rates
Deducting Gambling Losses
You can deduct gambling losses, but only up to the amount of gambling income you report that year. Won $50,000 and lost $20,000 across all gambling activity? You can deduct the $20,000. You cannot use losses to create a net deduction below zero. The deduction is only available if you itemize on Schedule A; taxpayers who take the standard deduction get nothing.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses
For most lottery winners the deduction is a minor consolation. Losses must come from actual gambling activity during the same tax year, and you need real records: an accurate diary or log of wins and losses, plus receipts, tickets, and statements.6Internal Revenue Service. Topic No. 419, Gambling Income and Losses A shoebox of losing scratch-offs and a rough guess will not survive an audit.
Group Tickets and Office Pools
When a group wins together, the tax picture gets ugly fast. The IRS treats the person who signs the ticket as the sole owner unless documentation says otherwise. If one person claims the whole prize and then hands out shares, those distributions can be treated as taxable gifts rather than split winnings, sticking the signer with income tax on the full amount and gift tax on what was handed out.
The correct approach is to file Form 5754 before the prize is paid. That form lists each participant’s name, taxpayer identification number, and share, and it directs the lottery agency to issue a separate W-2G to each person.10Internal Revenue Service. Form 5754 – Statement by Person(s) Receiving Gambling Winnings Each member then reports only their own share. The group should also have a written agreement, signed before the drawing, that names each participant and their percentage. Without both the agreement and Form 5754, the person who cashes the ticket is exposed.
Giving Money to Family and Friends
Large cash gifts trigger a separate federal tax that many winners do not see coming. The annual gift tax exclusion for 2026 is $19,000 per recipient. You can give up to that amount to as many people as you want each year without any gift tax consequence. A married couple can combine exclusions, effectively giving $38,000 per recipient per year.
Gifts above the annual exclusion draw down your lifetime gift and estate tax exemption, which for 2026 is $15,000,000.11Internal Revenue Service. What’s New — Estate and Gift Tax Once the lifetime exemption is used up, further gifts are taxed at 40%. A winner who collects $100 million and writes $5 million checks to ten relatives burns through the exemption fast. You also have to file a gift tax return (Form 709) for any year you give more than the annual exclusion to any single person, even when no tax is owed because you are drawing against the lifetime exemption.
This is why the difference between a documented pool and an after-the-fact gift matters so much. Under a pre-drawing agreement, each member’s share is their own income. Without one, everything above the annual exclusion is a gift.
Estate Tax on Unpaid Annuity Payments
Winners who choose the annuity and die before all installments are paid leave their families a problem. The remaining payments are included in the deceased winner’s taxable estate, generally valued by discounting the future payments to present value using IRS actuarial tables. For 2026, estates above $15,000,000 owe federal estate tax at rates up to 40%.12Internal Revenue Service. Estate Tax
The practical problem is liquidity. Most state lotteries do not allow annuity payments to be sold, transferred, or accelerated. The estate owes tax on a stream of income it cannot easily convert into cash to pay that tax. Heirs then continue to receive the annual payments and owe income tax on each one as it arrives, on top of the estate tax already paid on the present value of the stream. This double layer is one of the strongest financial arguments for choosing the lump sum when the estate is likely to be large. Anyone leaning toward the annuity should talk with an estate planning attorney before claiming the prize.