Tax on Lottery Winnings: Federal, State, and Withholding

The tax on lottery winnings is federal ordinary income tax at rates up to 37%, plus state income tax in most states and sometimes a city tax on top. The lottery commission withholds 24% for the IRS on any prize over $5,000, but that withholding is just a down payment. The real tax is calculated on your full-year return, and for large jackpots it is almost always higher than what was held back.

What the Lottery Withholds Before You Get Paid

Federal law requires the lottery to withhold 24% of any payout above $5,000 and send it to the IRS.¹ You receive Form W-2G showing the gross prize in Box 1 and the tax withheld in Box 4.² The withholding is automatic and works like paycheck withholding.

Prizes between $2,000 and $5,000 are reported on a W-2G starting in 2026 but do not have federal tax withheld automatically.² You still owe income tax on those smaller wins; you just have to pay it when you file.

Why the Real Tax Bill Is Usually Higher Than 24%

The IRS treats lottery winnings as ordinary income, stacked on top of your wages and everything else you earned that year.³ The federal system is progressive, and the top rate is 37% on income above a threshold that changes each year with inflation.⁴ Only the portion of income within a given bracket is taxed at that bracket’s rate, so lower slices of the prize are taxed at 10%, 12%, 22%, and so on.

For a large prize, most of the money still lands in the 32%, 35%, and 37% brackets. Take a $1 million win. The lottery withholds $240,000, but the actual federal tax, once the prize is stacked on ordinary wages, can easily run $130,000 higher. That gap is due when you file, not when you claim the prize.

State and Local Taxes on Top of Federal

Where you bought the ticket and where you live determine the second layer. About a dozen states either have no income tax or specifically exempt lottery prizes. Winners there keep everything left after federal tax.

The rest of the states tax lottery income at rates roughly from 3% to over 10%, with many falling between 5% and 8%. Some states withhold at payout; others fold the winnings into a progressive state income tax that gets settled at filing time. A few large cities pile on their own tax. New York City withholds a local tax on top of the state rate, and Yonkers does the same at a lower percentage, typically adding somewhere between 1% and 4%. Combined federal, state, and local tax can approach 50% of the prize in the highest-tax jurisdictions.

Lump Sum or Annuity: How Each Is Taxed

Most large lotteries let you choose between a single lump-sum cash payment and an annuity that pays out over 20 to 30 years. The tax treatment is very different.

A lump sum is fully taxable in the year you receive it. On a $100 million advertised jackpot, the cash value might be around $50 million, and nearly all of it lands in the 37% bracket. The 24% withholding covers only part of the bill; the balance is owed at filing.

An annuity spreads the prize across decades. Each yearly payment is taxed only in the year it is received. A large annual payment still pushes you into the top bracket in most cases, but the lifetime tax total can be lower because the prize is not compressed into a single return. The trade-off is that future tax rates could rise, and you give up flexibility over the money.

How To Report Lottery Winnings on Your Return

Lottery winnings go on Schedule 1 of Form 1040 as “other income.”⁵ Move the gross prize from Box 1 of your W-2G onto Schedule 1, and enter the federal tax already withheld (Box 4) in the payments section of Form 1040. Your return then reconciles the 24% withheld against what you actually owe.

You have to report all gambling winnings, including small lottery prizes, even if no W-2G was issued.⁵ The $500 scratch-off counts too.

If a group played together, the person who claims the ticket should file Form 5754 with the lottery so each member receives a separate W-2G for their share.² Skipping this step causes serious problems, discussed in the gifting section below.

Deducting Gambling Losses

You can deduct gambling losses, but only if you itemize on Schedule A instead of taking the standard deduction.⁵ For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.⁶ If your total itemized deductions don’t exceed that, there’s no benefit.

Two limits cap the deduction. You can never deduct more than you won: if you won $10,000 and lost $15,000, the ceiling is $10,000. And starting with tax year 2026, only 90% of gambling losses are deductible. If you won $100,000 and lost $80,000, you can deduct $72,000 rather than the full $80,000. The 90% cap was enacted by legislation signed in July 2025 and applies to tax years beginning after December 31, 2025.⁷

Records matter. Keep tickets, receipts, casino or lottery statements, and a log of wins and losses. The IRS closely scrutinizes gambling loss claims, and without documentation the deduction won’t hold up.

Estimated Tax Payments and the Underpayment Penalty

Because 24% withholding rarely covers the full federal tax on a large prize, you will likely need to make estimated tax payments using Form 1040-ES to cover the gap.⁸ The IRS expects taxes to be paid as income is received, not in a single balance in April.

You avoid an underpayment penalty if your total payments (withholding plus estimated payments) equal at least 90% of your current-year tax or 100% of your prior-year tax, whichever is smaller. If your prior-year adjusted gross income exceeded $150,000, the prior-year figure jumps to 110%.⁹ For most first-time lottery winners, the prior-year safe harbor is a low bar because last year’s tax was modest.

Quarterly deadlines for 2026 are April 15, June 15, and September 15, 2026, and January 15, 2027.⁸ If you win mid-year, make the next quarterly payment right away rather than waiting until the following April. The underpayment penalty for 2026 accrues at 7% annually, compounded daily.¹⁰ On a six-figure shortfall, that adds up quickly.

Sharing a Prize Can Trigger Gift Tax

If you claim a prize alone and then write checks to family or friends, the IRS can treat those transfers as taxable gifts, even if you all agreed to share the ticket beforehand.

In 2026, you can give up to $19,000 per recipient per year without gift tax consequences. Amounts above that count against a lifetime gift and estate tax exemption of $15,000,000.¹¹ Amounts above the lifetime exemption are taxed at 40%, and it is the giver, not the recipient, who pays.

The clean way to handle a group win is a written agreement in place before you claim, and Form 5754 filed with the lottery so each participant gets a W-2G for their share.² Without that, the signer of the ticket can be treated as the sole winner making gifts to everyone else.

If You Are Not a U.S. Resident

Non-resident aliens who win a U.S. lottery have 30% withheld instead of 24%.² The winnings are reported to the IRS on Form 1042-S, and the winner files Form 1040-NR rather than a standard 1040.¹²

Some countries have tax treaties with the United States that reduce or eliminate tax on gambling winnings; Canadian residents, for example, may claim treaty benefits on Schedule NEC of Form 1040-NR. Non-resident winners generally cannot deduct gambling losses unless connected to a U.S. trade or business, which doesn’t cover casual lottery play.¹² For most foreign winners, the 30% (or treaty rate) is effectively the final tax.

What Happens to Annuity Payments If a Winner Dies

If a winner who chose an annuity dies before the payout period ends, the remaining payments continue to heirs or named beneficiaries. Each payment is taxed as ordinary income to the recipient at their own rate. It is not an inheritance that escapes income tax.

For estate tax purposes, the present value of the remaining annuity payments is included in the winner’s gross estate, valued using IRS actuarial tables rather than face value. The federal estate tax exemption for 2026 is $15,000,000, so only estates above that face federal estate tax.¹¹ Amounts above the exemption are taxed at rates up to 40%, and heirs still owe income tax on each annuity payment as it arrives. The same prize can be hit twice.

A lump sum sidesteps this. All the income tax is paid upfront, and whatever remains is simply an asset of the estate at fair market value. That estate tax exposure is one reason the annuity choice deserves professional advice before the ticket is claimed.

1
Office of the Law Revision Counsel. 26 U.S. Code 3402 – Income Tax Collected at Source
2
Internal Revenue Service. Instructions for Forms W-2G and 5754
3
Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined
4
Internal Revenue Service. Federal Income Tax Rates and Brackets
5
Internal Revenue Service. Topic No. 419, Gambling Income and Losses
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
7
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
8
Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals
9
Office of the Law Revision Counsel. 26 U.S. Code 6654 – Failure by Individual To Pay Estimated Income Tax
10
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
11
Internal Revenue Service. What’s New — Estate and Gift Tax
12
Internal Revenue Service. Instructions for Form 1040-NR