What Taxes Do You Owe on Lottery Winnings?

Federal tax on lottery winnings runs as high as 37%, but the lottery agency only withholds 24% up front on prizes over $5,000, so most big winners owe a substantial additional amount when they file.¹ State income tax adds anywhere from nothing to roughly 10.9% on top of that, depending on where you bought the ticket and where you live. After federal and state taxes on lottery winnings, a large jackpot winner typically keeps about 55% to 65% of a lump-sum payout.

What the Federal Government Takes

The lottery agency withholds 24% of any net winnings above $5,000 and sends it to the IRS before you see the money.¹ Net winnings means the prize minus what you paid for the ticket. On a $10 million win from a $1 ticket, $2.4 million goes to the IRS immediately and you take home the rest.

That 24% is a prepayment, not the final bill. Lottery winnings stack on top of your other income for the year, and federal rates climb quickly. For a single filer in 2026:²

10% up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% over $640,600

For married couples filing jointly, the 37% bracket starts at $768,700.² Any jackpot worth celebrating blows past these numbers, so almost the entire prize gets taxed at 37%. On a $5 million lump sum, the first $640,600 is taxed at the blended lower rates and the remaining $4.36 million at 37%. Since only 24% was withheld, you’ll owe roughly 13 additional percentage points on most of the prize when you file. That gap on a $5 million win is more than $500,000 due by April.

Reporting Threshold vs. Withholding Threshold

These two numbers get mixed up constantly. Starting in 2026, the lottery agency files a Form W-2G reporting your winnings to the IRS once the prize hits $2,000 and is at least 300 times the wager.³ That threshold used to be $600 and was raised for inflation. Mandatory withholding is separate and still doesn’t kick in until net winnings exceed $5,000.¹ So a $3,000 scratch-off win produces a W-2G but no automatic withholding. You still owe tax on it; the IRS just expects you to settle up yourself when you file.

Lump Sum vs. Annuity

Every major lottery lets winners choose between a single lump-sum payment and an annuity spread over 20 to 30 years. The tax consequences of each are very different.

Lump Sum

The lump-sum cash value is typically 50% to 60% of the advertised jackpot. A $500 million headline number might mean a $250 million cash payout. The full amount counts as income in the year you claim it, so nearly all of it lands in the 37% bracket.² After federal and state taxes, most winners keep 55% to 65% of the lump-sum amount. The advantage is control: you can invest the after-tax proceeds immediately.

Annuity

An annuity taxes each year’s payment only in the year you receive it. A $500 million jackpot paid over 30 years is roughly $16 million annually, which still lands in the 37% bracket. On smaller prizes, annual payments may keep you in a lower bracket some years. The annuity also delivers the full advertised jackpot over time rather than the discounted cash value.

The trade-off is flexibility. You can’t accelerate payments, and if you die before the annuity ends, the remaining payments become part of your estate. For 2026, the federal estate tax exclusion is $15 million, and anything above that is taxed at 40%.⁴ A sizeable remaining balance can push an estate past that line, leaving heirs to pay estate tax on top of the income tax they’ll owe on each future payment.

State and Local Taxes

State income tax on lottery winnings ranges from 0% to about 10.9%. Eight states impose no state income tax on lottery prizes: California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Five more states don’t run a lottery at all: Alabama, Alaska, Hawaii, Nevada, and Utah.

Everywhere else, the state takes a cut. Some states withhold at a flat rate at payout; others make you square up on your state return. Some cities layer on their own local income tax, adding several more percentage points. If you buy the ticket in one state and live in another, both may have a claim on the income. Most states offer a credit for taxes paid to the other jurisdiction, but the credit doesn’t always cancel the difference, especially when your home state’s rate is higher than the state where you bought the ticket.

Using Gambling Losses to Reduce the Bill

Gambling losses from the same tax year can offset gambling income, up to (but not exceeding) the amount you won.⁵ A $50,000 win paired with $20,000 in documented losses gets reported as $50,000 in gambling income and a $20,000 deduction, leaving $30,000 taxable. Losses can’t create an overall tax loss or offset non-gambling income.

Two catches. First, you have to itemize on Schedule A to claim the deduction, which means the losses do nothing for you if you take the standard deduction. Second, you need records: a gambling diary or log plus receipts, tickets, and statements showing both wins and losses.⁵ Vague estimates don’t survive an audit.

Group Tickets and Office Pools

A pool creates a specific problem: the lottery agency writes one check to one person, but the IRS needs to know how the prize actually splits. The person who collects the prize files IRS Form 5754, which lists every group member, each share, and any tax withheld.⁶ The agency then issues a separate W-2G to each member for their share, and each person reports only their own portion.

Skipping this step is costly. If one person claims the whole prize and distributes shares informally afterward, the IRS may treat those distributions as taxable gifts. The 2026 lifetime gift and estate tax exclusion is $15 million, and a large informal split can trigger gift tax on top of income tax.⁴ A written pool agreement signed before the drawing, spelling out each person’s share, is the cleanest proof that the split was planned from the start.

Reporting Winnings on Your Tax Return

You’ll receive a Form W-2G from the lottery agency showing the full prize in Box 1 and any federal tax withheld in Box 4.⁷ State withholding, if any, appears in separate boxes. Check the numbers against your own records before you file.

Report the gross winnings on Schedule 1 (Form 1040), Line 8b, which is designated for gambling income.⁸ That total flows to Line 8 of your Form 1040. Federal tax withheld from the W-2G is reported on Form 1040 as part of your total federal withholding and credited against your final tax liability.⁷ Gambling losses go on Schedule A as an itemized deduction.

Avoiding an Underpayment Penalty

Because 24% withholding won’t cover a 37% tax bill, the IRS can charge an underpayment penalty on top of the tax due. You avoid the penalty if your total payments during the year (withholding plus any estimated tax payments) cover at least 90% of your current year’s tax bill or 100% of last year’s tax, whichever is smaller. If your adjusted gross income last year topped $150,000, that second threshold rises to 110%.⁹

For most lottery winners, the prior-year safe harbor is the easy path. If you earned $80,000 last year and owed $12,000 in federal tax, then paying $12,000 through withholding and estimated payments this year shields you from penalties no matter how large the final bill turns out. The 24% withheld from a big prize will almost always clear that number by a wide margin. If you win late in the year and the withholding hasn’t posted yet, an estimated payment through EFTPS or IRS Direct Pay before January 15 of the following year covers the final quarter.¹⁰ The practical rule: don’t spend the prize before setting aside enough to close the gap between 24% and 37%.

1
Internal Revenue Service. Instructions for Forms W-2G and 5754
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Instructions for Forms W-2G and 5754 (Rev. January 2026)
4
Internal Revenue Service. What’s New – Estate and Gift Tax
5
Internal Revenue Service. Topic No. 419, Gambling Income and Losses
6
Internal Revenue Service. Form 5754 – Statement by Person(s) Receiving Gambling Winnings
7
Internal Revenue Service. Form W-2G, Certain Gambling Winnings
8
Internal Revenue Service. Schedule 1 (Form 1040), Additional Income and Adjustments to Income
9
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
10
Internal Revenue Service. Payments