Lottery winnings are taxed as ordinary income by the federal government. The lottery agency withholds 24% before paying you, but most of a large prize will actually land in the 37% top federal bracket, so you’ll owe the difference when you file. State income tax adds anywhere from 0% to roughly 10.9% depending on where you live and where you bought the ticket.
What the Lottery Withholds Before You See the Money
Whenever your winnings minus the cost of the ticket exceed $5,000, the lottery agency is required to withhold 24% for federal income tax before cutting your check.1Internal Revenue Service. Instructions for Forms W-2G and 5754 On a $10 million cash prize, roughly $2.4 million goes to the IRS on the spot. This is a prepayment, not a final settlement.
The agency reports your gross winnings and the amount withheld on Form W-2G, and you receive a copy.2Internal Revenue Service. About Form W-2 G, Certain Gambling Winnings For 2026, the reporting threshold for a W-2G is $2,000 in proceeds. Smaller prizes are still taxable, but no form is issued and you have to report the income yourself.3Internal Revenue Service. Topic No. 419, Gambling Income and Losses
Your Actual Federal Tax Rate on a Jackpot
The 24% withheld rarely covers what you owe. Federal income tax is progressive, so your winnings stack on top of your other income and each slice is taxed at a higher rate. The 2026 brackets for single filers:4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 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% on income above $640,600
For married couples filing jointly, the 37% bracket starts at $768,701.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Any real jackpot pushes almost the entire prize into that top bracket. You owe 37% on the bulk of the money, but only 24% was withheld. The 13-point gap comes due the following April. On a $50 million lump sum, that gap can easily exceed $6 million.
Winners who don’t plan for the shortfall can face an underpayment penalty on top of the tax if they win mid-year and fail to make estimated payments to close the gap.
Lump Sum or Annuity: Does It Change the Tax?
Every major lottery offers two payout options, and the choice reshapes how the tax lands.
Lump Sum
The lump sum, or cash option, is not the headline jackpot. It’s typically about half of the advertised amount, because the headline assumes decades of investment growth on the annuity. On a billion-dollar jackpot, the cash value might be around $500 million. That entire amount hits a single tax year, which virtually guarantees every dollar above $640,600 for a single filer sits in the 37% bracket. After federal tax and state tax, a $500 million cash prize can shrink to roughly $300 million or less.
Annuity
The annuity spreads the full advertised jackpot across 20 to 30 annual payments that grow slightly each year. You report and pay tax only on the payment received in a given year. On a $1 billion jackpot paid over 30 years, each installment lands somewhere around $30 to $40 million, still firmly in the top bracket.
The annuity doesn’t lower your rate on a large prize, because each annual payment far exceeds the 37% threshold on its own. What it does provide is exposure to future rate changes: if Congress lowers rates later, later payments benefit. The tradeoff is giving up control of the money and accepting the risk that the funding entity could have trouble decades out.
State Taxes on Lottery Winnings
Most states tax lottery winnings as ordinary income, at rates running from 0% to roughly 10.9%. On a large prize, the state you live in can matter by millions of dollars.
Eight states do not tax lottery winnings at all: California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. A few other states don’t operate their own lotteries, so the question doesn’t come up there. Every other state with an income tax applies it to prizes, and most require the lottery agency to withhold state tax before payment.
Things get more complicated when the ticket was bought in one state and the winner lives in another. You may owe tax to both the purchase state and your home state. Most states with income taxes offer a credit for taxes paid to the other state, which prevents full double taxation, but the credit only reaches up to the lower of the two rates. If your home state’s rate is higher, you owe the difference at home.
Can You Deduct Gambling Losses?
Yes, but the rules tightened for 2026. You can now deduct only 90% of your gambling losses for the year, and only up to the amount of your gambling winnings. The 90% cap was enacted by the One, Big, Beautiful Bill Act and applies to tax years beginning after December 31, 2025.5Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses Before 2026, losses were deductible dollar-for-dollar up to winnings. Now, if you have $50,000 in documented losses, you can deduct $45,000.
You have to itemize to claim the deduction. The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 For a major winner, itemizing usually makes sense. You also need real records: the IRS expects a log of your gambling activity along with receipts or statements showing both wins and losses.3Internal Revenue Service. Topic No. 419, Gambling Income and Losses
Splitting a Prize With a Group
If you played in an office pool or with friends, don’t just cash the ticket and split the money afterward. Without documentation, the IRS treats the full prize as income to whoever claimed it, and passing shares to the others later can be characterized as taxable gifts.
The right paperwork is Form 5754. The person cashing the ticket lists each group member and their share, and the lottery agency then issues a separate W-2G to each participant for their portion.6Internal Revenue Service. Instructions for Forms W-2G and 5754 (Rev. January 2026) Withholding and reporting thresholds are calculated on the total prize, not on each share. If you’re in a pool, put the agreement in writing before you buy tickets, because a handshake after the numbers are drawn generally won’t hold up.
If You’re Not a U.S. Resident
Foreign nationals who win a U.S. lottery prize face a flat 30% federal withholding, higher than the 24% for U.S. residents, and the withholding is reported on Forms 1042 and 1042-S instead of Form W-2G.1Internal Revenue Service. Instructions for Forms W-2G and 5754
Tax treaties can reduce or eliminate that withholding. Residents of more than two dozen countries, including the United Kingdom, France, Germany, Japan, and most EU member states, are fully exempt from U.S. tax on gambling winnings under their treaties. Residents of Malta face a reduced rate of 10%. To claim any treaty benefit, the winner must give the paying agent a Form W-8BEN with a valid taxpayer identification number before payment.7Internal Revenue Service. Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities Treaty benefits that previously covered residents of Hungary and Russia are no longer in effect, so those winners now pay the full 30%.
What You Owe After the Prize
The tax story doesn’t stop with the check. Investment income from what’s left of the prize has no automatic withholding, and gifts to family have their own rules.
Quarterly Estimated Taxes
Interest, dividends, and capital gains from investing the winnings generate tax bills the IRS expects you to prepay through quarterly estimated payments on Form 1040-ES.8Internal Revenue Service. Estimated Taxes Miss them and you owe an underpayment penalty. To avoid it, you generally need to pay at least 90% of the current-year tax or 100% of the prior year’s, but for anyone with adjusted gross income above $150,000, which includes every jackpot winner, the prior-year safe harbor rises to 110%.9Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty In the year you win, the annualized income installment method can help if the prize lands in a single quarter.
Giving Money Away
The 2026 annual gift tax exclusion is $19,000 per recipient. A married couple can give $38,000 per recipient per year through gift-splitting, and you can give to as many people as you want each year at that limit without any gift tax consequences.10Internal Revenue Service. What’s New – Estate and Gift Tax
Gifts above the annual exclusion are reported on Form 709 and eat into your lifetime estate and gift tax exemption, which is $15,000,000 per person for 2026 following the One, Big, Beautiful Bill Act.10Internal Revenue Service. What’s New – Estate and Gift Tax Going over the annual exclusion doesn’t trigger immediate tax; it just reduces the lifetime cushion. Most winners won’t reach $15 million in lifetime taxable gifts unless they’re deliberately moving assets out of their estate.
Winning is a one-time event; the tax obligations that follow it are annual. The shift from a W-2 to quarterly filings, investment income, and gift reporting is the part most winners underestimate, and it’s where a tax professional earns their fee.