Federal tax takes 24 percent right away, then you owe more at tax time

When you win the lottery, the state or lottery operator withholds 24 percent of your winnings for federal income tax before you get a check. That is not your final tax bill — it is a down payment. You will owe additional federal tax when you file your return, because lottery winnings are taxed as ordinary income at rates up to 37 percent depending on your total income for the year.

The amount you actually owe depends on your total household income, your filing status, and whether you take the lump sum or annuity. A $1 million lottery win does not mean you pay tax on $1 million; it means the $1 million is added to your other income, and you pay tax on the combined total at your marginal rate.

Most lottery winners are surprised by the gap between the 24 percent withheld and what they actually owe. If you win a large amount, you should set aside money for taxes before spending the winnings, because the IRS will expect payment when you file.

Key Takeaways

  • The lottery operator withholds 24 percent for federal tax automatically; this is not your final bill.
  • You will owe additional federal income tax at your marginal rate (up to 37 percent) when you file your tax return.
  • State and local taxes vary widely — some states tax lottery winnings at 8 percent or more, and some cities add their own tax.
  • Lump sum and annuity payouts are taxed differently; the annuity spreads the income over time and may result in lower total tax.
  • You must report lottery winnings on your federal return even if the lottery operator withheld tax.

How the 24 percent withholding works

When you claim a lottery prize, the lottery operator or state agency deducts 24 percent and sends it to the IRS on your behalf. This happens before you receive any money. If you win $100,000, you receive $76,000 and the lottery sends $24,000 to the federal government.

This withholding is mandatory for prizes over $5,000 in most states. Smaller prizes may not trigger withholding, but you still owe tax on them. The 24 percent is a flat federal withholding rate set by law; it does not change based on your income or tax bracket.

The withholding is credited against your actual tax liability when you file. If your actual federal tax on the winnings turns out to be less than 24 percent, you may get a refund. If it is more, you owe the difference.

Your actual federal tax bill at tax time

Lottery winnings are taxed as ordinary income. The IRS adds the full amount of your winnings to your other income for the year and applies your marginal tax rate. Federal tax brackets for 2024 range from 10 percent to 37 percent depending on your total income and filing status.

If you earn $50,000 from your job and win $100,000 in the lottery, your taxable income is $150,000. You pay tax on that $150,000 at the rates that apply to that income level, not at a flat rate. For a single filer in 2024, income above $191,950 is taxed at 35 percent or 37 percent, so a large lottery win can push you into a higher bracket.

When you file your tax return, you report the lottery winnings on Form 1040 and Schedule 1. The lottery operator also sends you a Form W-2G showing the amount won and the amount withheld. You must report this on your return even if you do not receive a W-2G.

State and local taxes on lottery winnings

State tax on lottery winnings varies widely. Some states do not tax lottery winnings at all — Florida, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. Other states tax lottery winnings at their ordinary income tax rate, which can range from 2 percent to over 13 percent.

New York State taxes lottery winnings at up to 8.82 percent, and New York City adds an additional 3.876 percent tax on winnings claimed by city residents. California does not tax lottery winnings, but federal tax still applies. Illinois taxes lottery winnings at a flat 4.95 percent rate separate from ordinary income tax.

Some cities and counties also impose local tax on lottery winnings. You should check your state revenue department and local tax authority to learn the exact rate that applies to you. The lottery operator may withhold state tax automatically, or you may owe it when you file your state return.

Lump sum versus annuity: tax differences

Most lottery winners choose between a lump sum payment now or an annuity paid over 20 to 30 years. The lump sum is smaller — typically 50 to 60 percent of the advertised jackpot — but you receive it immediately. The annuity is the full advertised amount, paid in equal installments over time.

The lump sum is taxed in the year you receive it. If you win a $100 million jackpot and take the lump sum of $60 million, you owe federal tax on $60 million in that year. This can push you into the highest tax bracket and result in a very large tax bill.

The annuity spreads the income over multiple years. If the same $100 million jackpot is paid as an annuity of $3.3 million per year over 30 years, you owe tax on $3.3 million each year. This may keep you in a lower tax bracket and reduce your total federal tax, though state tax treatment varies by state.

What happens if you do not pay the taxes owed

If your actual tax liability is higher than the 24 percent withheld, you must pay the difference when you file your return. The IRS will assess penalties and interest if you do not pay by the tax deadline.

Many lottery winners make the mistake of spending the full amount they receive without setting aside money for taxes. If you win $1 million and the lottery withholds $240,000, you receive $760,000. But if your actual federal tax is $370,000 (37 percent), you owe an additional $130,000 at tax time. If you have already spent the money, you will need to pay from other sources or face penalties.

A tax professional or CPA can help you estimate your actual tax liability before you claim the prize, so you know how much to set aside. Some lottery winners put 40 to 50 percent of their winnings into a separate account immediately to cover federal, state, and local taxes.

Frequently Asked Questions

Can I avoid paying taxes on lottery winnings?

No. Lottery winnings are taxable income, and the IRS requires you to report them. The lottery operator withholds 24 percent automatically, and you must pay any additional tax owed when you file your return. Failing to report lottery winnings can result in criminal charges for tax evasion.

What if I win a small amount — do I still owe tax?

Yes. Lottery winnings of any amount are taxable. Prizes under $5,000 typically do not trigger automatic withholding, but you still owe tax on them. You must report small winnings on your tax return. The lottery operator may not send you a W-2G for small prizes, but that does not mean you can skip reporting them.

Do I owe tax if I won the lottery in a state with no income tax?

You still owe federal tax. Federal withholding of 24 percent applies regardless of where you live. If you live in a state with no income tax, you do not owe state tax, but you will owe federal tax at your marginal rate. If you live in a state with income tax, you owe both federal and state tax.

Can I deduct lottery losses against my winnings?

You can deduct gambling losses, but only if you itemize deductions on your tax return, and only up to the amount of your gambling winnings. You cannot use losses to reduce your taxable income below zero. Most people take the standard deduction instead, which means they cannot deduct losses at all.

What if I split a lottery ticket with someone?

Each person who has a claim to the ticket is responsible for tax on their share of the winnings. If you and a friend split a $100,000 prize, you each owe tax on $50,000. The lottery operator will withhold 24 percent from the total and may issue separate W-2G forms to each winner, or you may need to report the split on your tax return.