Federal tax takes 24% right away, then you owe more at tax time
When you win the lottery, the lottery commission withholds 24% of your winnings for federal income tax before you receive a check. That is not your final tax bill — it is a down payment. Depending on your total income for the year and your tax bracket, you will owe additional federal tax when you file your return, sometimes much more. The actual rate can range from 24% to 37% depending on how large the prize is and what other income you earned that year.
State and local taxes add on top of federal withholding. Most states tax lottery winnings as ordinary income, and the rate varies by state. Some states do not tax lottery winnings at all. A few states tax only the lottery commission's portion, not the full prize. You need to know your state's rule because the total tax burden — federal plus state — can take 40% to 50% or more of a large prize.
Key Takeaways
- The lottery commission withholds 24% for federal tax before you get paid, but your actual federal tax rate may be 24% to 37% depending on your tax bracket and total income.
- State and local taxes are separate and vary widely — some states take nothing, others take 5% to 13% or more of your winnings.
- You report lottery winnings on your federal tax return as "other income" and pay any additional tax owed when you file.
- Lump-sum prizes are taxed differently than annuity payments, and the difference in total tax can be substantial over time.
How the 24% federal withholding works
When you claim a lottery prize at the lottery office, the commission is required by law to withhold 24% of the winnings for federal income tax. This withholding happens automatically — you do not choose it. If you win $1 million, the lottery holds back $240,000 and sends it to the IRS. You receive $760,000 in your hand or bank account.
That 24% is a withholding, not a tax rate. It is money held in advance to cover part of your tax liability. When you file your federal income tax return the following year, you report the full prize amount as income. The IRS calculates what you actually owe based on your tax bracket. If your actual rate is higher than 24%, you owe the difference. If it is lower, you may receive a refund of the overage.
Federal tax brackets for lottery winnings
Lottery winnings are taxed as ordinary income, which means they are added to any other income you earned that year — wages, self-employment income, investment gains, and so on. The total determines your tax bracket and your rate.
For 2024, the top federal tax bracket is 37%, which applies to single filers with taxable income over $578,100 and married filers over $693,750. A large lottery prize can push you into this bracket even if you had no other income. A $10 million lump-sum prize, after the 24% withholding, leaves you with $7.6 million in taxable income. Your actual federal tax on that would be roughly $3.7 million, meaning you owe an additional $1.46 million beyond the 24% already withheld.
The exact amount you owe depends on the year you claim the prize, your filing status, and whether you take the lump sum or an annuity. A tax professional can model both options before you decide.
State and local taxes on lottery prizes
State tax treatment of lottery winnings varies significantly. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax lottery winnings at all. If you win in one of these states and live in one of these states, you owe no state income tax on the prize.
Most other states tax lottery winnings as ordinary income at their standard rate. New York, for example, taxes lottery winnings at up to 8.82% state income tax, plus an additional 3.876% New York City tax if you live in the city. Maryland taxes lottery winnings at up to 5.75%. California taxes lottery winnings but does not allow the state to withhold — you pay the tax when you file your state return.
Some states withhold state tax at the point of claim, similar to federal withholding. Others do not withhold and expect you to pay when you file. Check your state lottery commission's website or call them directly to learn the withholding rule and the tax rate in your state.
Lump sum versus annuity: the tax difference
Most lotteries offer two payout options: a lump sum (one payment now) or an annuity (payments over 20 to 30 years). The lump sum is always smaller than the advertised jackpot because it represents the present value of the annuity payments. The tax treatment differs between the two, and the difference in total tax paid can be substantial.
With a lump sum, you receive the entire after-withholding amount in one year, and you owe all remaining federal and state tax in that year. This can push you into the highest tax bracket and result in a larger total tax bill. With an annuity, you receive payments spread over many years, which may keep you in a lower tax bracket each year and reduce your total tax burden. However, annuity payments are also subject to the 24% federal withholding and state tax each year.
A $100 million advertised jackpot might be $60 million as a lump sum. After 24% federal withholding, you receive $45.6 million. Your actual federal tax on that lump sum could be $20 million or more, depending on your state and other income. The same $100 million as an annuity might result in lower total tax because each annual payment is smaller and taxed separately. Run both scenarios with a tax professional before you claim.
Reporting lottery winnings on your tax return
You report lottery winnings on IRS Form 1040, Schedule 1, under "Other Income." The lottery commission sends you a Form W-2G (Certain Gambling Winnings) showing the amount won and the federal withholding. You attach this form to your return. If you won in multiple states or from multiple lotteries, you may receive multiple W-2Gs, and you report each one.
State tax returns require similar reporting. Most states ask you to report the full prize amount and show the state withholding (if any) as a credit against your state tax liability. If your state did not withhold, you owe the full state tax when you file. If your state withheld more than you owe, you receive a refund.
File your return on time. If you owe additional tax beyond the withholding, the IRS charges interest and penalties if you do not pay by April 15. Some lottery winners set aside a portion of their winnings immediately to cover the tax bill and avoid surprises.
Frequently Asked Questions
Do I have to pay taxes on lottery winnings if I live in a no-tax state?
If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, or New Hampshire, you owe no state income tax on lottery winnings. You still owe federal tax. If you live in a state that taxes lottery winnings but won the lottery in a no-tax state, you may owe tax to your home state depending on that state's rules — check with your state tax authority.
Can I reduce my tax bill by taking the annuity instead of the lump sum?
Possibly. An annuity spreads your income over many years, which may keep you in a lower tax bracket each year and reduce total federal tax. However, you receive less money overall because the annuity is worth less in today's dollars. A tax professional can calculate the after-tax value of both options for your specific situation.
What if I owe more tax than the 24% withheld?
You pay the additional amount when you file your federal and state tax returns. If you expect to owe a large amount, you can make an estimated tax payment to the IRS before filing to avoid penalties. Your tax professional can advise you on timing and amount.
Are lottery winnings subject to self-employment tax?
No. Lottery winnings are not self-employment income, so you do not owe the 15.3% self-employment tax (Social Security and Medicare). You owe only income tax — federal, state, and local.
Can I claim lottery losses to offset my winnings?
You can deduct gambling losses, but only up to the amount of gambling winnings you reported. You must itemize deductions on your tax return and keep detailed records of both wins and losses. Most lottery winners do not itemize because the standard deduction is larger.