Is the Cash Option Already Taxed? The 24% Withholding Gap

The cash option on a lottery prize is a pre-tax figure. Before you receive the check, the payer withholds a flat 24% for federal income tax, and most states take their own cut on top of that. But that 24% is only a down payment: on a multi-million-dollar prize, your actual federal rate lands close to 37%, so the cash option lottery tax you truly owe is well above what was held back. The rest comes due through estimated payments and your Form 1040.

Why the Entire Cash Option Is Taxed in One Year

The IRS treats lottery and gambling winnings as ordinary income, fully taxable in the year you receive the money.¹ Federal law taxes income in the year it is “actually or constructively received.”² Constructive receipt means the money has been made available to you, even if you haven’t cashed the check.³

Choosing cash collapses the entire prize into a single tax event. The payer reports one lump payment to the IRS, and nearly all of it lands in the top federal bracket. That single-year treatment drives everything below: how much is withheld, how much you still owe, and when you have to pay it.

What Gets Withheld Before You See the Money

The lottery or other payer withholds federal income tax at a flat 24% on the gross prize.⁴ For state-run lottery prizes, mandatory withholding kicks in once the cash option exceeds $5,000. The same $5,000 threshold applies to other gambling — horse racing, sweepstakes, and similar wagers — but the winnings must also be at least 300 times the amount wagered. Bingo, keno, and slot machine winnings are exempt from automatic withholding.⁵

The payer documents the gross winnings and the amount withheld on Form W-2G, which goes to both you and the IRS.⁶ Nonresident aliens face a higher rate: federal withholding on U.S. gambling winnings is 30% unless a tax treaty provides otherwise.⁷

State Tax on the Cash Option

Most states also tax lottery and gambling winnings, and the payer typically withholds the state share before cutting the check. Rates on large prizes run from roughly 3% to about 11%, and a handful of states withhold nothing. The rate usually follows the state where the ticket was purchased, not necessarily where you live.

If you bought the ticket in a state that taxes nonresidents and you live somewhere else, you could face withholding from both jurisdictions. Most states offer a credit for income tax paid to another state on the same income, so you generally will not be taxed twice on the full amount, but you will need to file returns in both states to claim the credit.

Why 24% Isn’t Enough: The Gap Between Withholding and What You Owe

Federal income tax is progressive: higher slices of income are taxed at higher rates. For 2026, the top federal rate is 37% on taxable income above $640,600 for single filers or $768,700 for married couples filing jointly.⁸

On a multi-million-dollar cash option, almost everything sits in that 37% bracket. Only the first roughly $640,000 is taxed at lower rates, which barely moves the needle on a large prize. Your effective federal rate ends up close to 37%, but only 24% was held back. The difference is what you still owe.

Put numbers on it. On a $50 million cash option, the federal tax comes out to roughly $18.4 million. The 24% withholding covers about $12 million, leaving around $6.4 million to settle through estimated payments or when you file.

Estimated Payments and the Underpayment Penalty

The IRS expects that gap to be closed during the year through estimated tax payments, not with a single check the following April.¹ For 2026, the installment deadlines are:⁹

April 15, 2026
June 15, 2026
September 15, 2026
January 15, 2027

You can skip the January installment if you file your 2026 return and pay in full by February 1, 2027.⁹

To avoid an underpayment penalty, you generally need to pay in at least 90% of the current year’s tax or 100% of the tax shown on your prior-year return, whichever is smaller.¹⁰ If your prior-year adjusted gross income was over $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110%.⁹ For a new winner whose prior-year income was modest, 110% of that old tax bill is still a small number, so basing your payments on the current year’s expected tax is usually the safer route.¹¹

Offsetting Winnings With Gambling Losses

Gambling losses from the same year can be deducted against gambling winnings, but only if you itemize on Schedule A, and only up to the amount of your winnings.¹ Losses beyond your winnings are not deductible, and you cannot carry excess losses forward.

A large cash option almost always makes itemizing worth it. The 2026 standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, and any combination of gambling losses, state taxes paid, and charitable contributions above those numbers will beat the standard deduction.⁸ Keep detailed records of dates, amounts wagered, and results, because the IRS can disallow loss deductions that aren’t substantiated.¹

One Kind of Lump Sum That Isn’t Taxed

If you landed here looking at a settlement rather than a lottery prize, the rules are different. A lump sum received for personal physical injury or physical sickness is generally excluded from gross income entirely, with no federal tax and no withholding.¹²¹³¹⁴ None of that applies to a lottery cash option, which is ordinary income from the first dollar.

1
Internal Revenue Service. Topic No. 419, Gambling Income and Losses
2
Office of the Law Revision Counsel. 26 U.S. Code 451 – General Rule for Taxable Year of Inclusion
3
eCFR. 26 CFR 1.451-1 – General Rule for Taxable Year of Inclusion
4
Internal Revenue Service. Instructions for Forms W-2G and 5754
5
Office of the Law Revision Counsel. 26 U.S. Code 3402 – Income Tax Collected at Source
6
Internal Revenue Service. About Form W-2G, Certain Gambling Winnings
7
Internal Revenue Service. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
9
Internal Revenue Service. Form 1040-ES, Estimated Tax for Individuals (2026)
10
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
11
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
12
Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness
13
eCFR. 26 CFR 1.104-1 – Compensation for Injuries or Sickness
14
Internal Revenue Service. Tax Implications of Settlements and Judgments