Federal tax on lottery winnings is 24 percent, withheld at the time you claim the prize

The federal government takes 24 percent of lottery winnings automatically when you collect your prize. This is a mandatory withholding, meaning the lottery commission deducts it before you receive any money. If you win $1 million, you will receive $760,000 and the lottery sends $240,000 to the Internal Revenue Service.

This 24 percent is not your final tax bill — it is a down payment. When you file your tax return the following year, the IRS calculates what you actually owe based on your total income for that year. Lottery winnings are taxed as ordinary income, which means they are added to your other earnings and taxed at your marginal rate. For most large lottery winners, the actual tax owed is higher than 24 percent, sometimes reaching 37 percent or more at the federal level alone.

The difference between what was withheld and what you owe is settled when you file. If 24 percent covered your full federal liability, you owe nothing more. If you owe more, you pay the difference. If you somehow owed less, you would receive a refund, though this is rare for large winnings.

Key Takeaways

  • The federal government withholds 24 percent of lottery winnings automatically, but your actual federal tax rate may be 37 percent or higher depending on your income bracket.
  • State and local taxes on lottery winnings range from zero to over 10 percent, and some states tax lottery winnings at a higher rate than other income.
  • Nine states have no income tax on lottery winnings: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire.
  • The total tax burden on a large lottery win can exceed 50 percent when federal, state, and local taxes are combined.
  • You receive the after-tax amount whether you take a lump sum or annuity payments, though the tax calculation differs between the two options.

State and local taxes vary widely and sometimes exceed federal withholding

Nine states do not tax lottery winnings at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. If you win in one of these states, you owe only the 24 percent federal withholding plus any federal tax owed at filing time.

The remaining 41 states and Washington, D.C., tax lottery winnings. State tax rates range from 2.9 percent in Colorado to over 10 percent in states like New York and Maryland. Some states tax lottery winnings at a higher rate than they tax regular income. For example, New York taxes lottery winnings at 8.82 percent but has a top income tax rate of 6.85 percent on regular earnings. This means lottery winners pay more tax on their prize than they would on the same amount earned as salary.

Many cities also impose local taxes on lottery winnings. New York City adds 3.876 percent on top of state tax. If you win a lottery in New York City, you face 24 percent federal withholding, 8.82 percent state tax, and 3.876 percent local tax — a combined 36.696 percent before your actual federal liability is calculated at tax time.

Lump sum and annuity payouts are taxed differently

Most lottery winners choose between a lump sum (one payment now) or an annuity (payments spread over 20 to 30 years). The tax treatment differs between the two.

With a lump sum, you receive the after-tax amount in one payment. The lottery withholds 24 percent federal tax when ready. State and local taxes are also withheld upfront. Your total tax bill is calculated on the lump sum amount you receive, which is typically 40 to 50 percent of the advertised jackpot.

With an annuity, you receive equal payments each year for 20 to 30 years. Taxes are withheld from each payment separately. Because each annual payment is smaller than the lump sum, you may fall into a lower tax bracket each year, potentially reducing your overall tax burden. However, you pay taxes over decades rather than when ready, and you do not receive the full amount upfront.

The choice between lump sum and annuity affects how much tax you pay, but both options result in significant tax liability. A financial advisor or tax professional can model both scenarios using your specific situation and state of residence.

How the 24 percent withholding is calculated

The 24 percent federal withholding applies to the full prize amount before any state or local taxes are deducted. If you win $10 million, the lottery withholds $2.4 million for federal tax, regardless of your state.

State and local taxes are withheld separately from the federal amount. The lottery commission withholds both, so you receive the prize minus all three. In a high-tax state, your total withholding can reach 40 percent or more before you ever see the money.

The 24 percent federal withholding is a flat rate that applies to all lottery winners. It does not change based on your income, filing status, or other deductions. This is why it often falls short of your actual federal tax liability — the IRS assumes you have no other income and no deductions, which is rarely true.

Your actual tax bill is determined when you file your return

The withholding is not your final tax bill. When you file your federal income tax return the following year, you report the lottery winnings as income. The IRS adds this to any other income you earned that year — wages, investment gains, rental income, and so on.

Your total income determines your tax bracket. If you earned $50,000 in salary and won a $5 million lottery, your taxable income is $5,050,000. This pushes you into the highest federal tax bracket, which is currently 37 percent. You would owe 37 percent of your total income in federal tax, minus any deductions or credits you may have access to for.

The 24 percent already withheld is credited against this amount. If you owe $2.1 million in federal tax and $2.4 million was withheld, you receive a refund of $300,000. If you owe $2.5 million, you owe an additional $100,000 at tax time. Most large lottery winners owe additional federal tax beyond the 24 percent withheld.

Taxes on annuity payments are recalculated each year

If you choose annuity payments, each annual payment is treated as income in the year you receive it. The lottery withholds 24 percent federal tax from each payment, plus state and local taxes.

Because each payment is smaller than the lump sum, your tax bracket may be lower in years when you receive only the annuity payment. For example, if your annuity payment is $200,000 per year and you have no other income, you are taxed at a lower rate than if you received the entire lump sum in year one. Over 20 or 30 years, this can result in lower total taxes paid, though you also lose the opportunity to invest the full amount upfront.

You still file a tax return each year and report the annuity payment as income. The withholding is credited against your actual tax liability, just as with a lump sum. If you have other income in a given year, your annuity payment may push you into a higher bracket for that year only.

Special situations: joint winners and trusts

If multiple people win together, each person's share is taxed separately. If four people split a $20 million jackpot, each person receives $5 million and is taxed on $5 million individually. The withholding is still 24 percent federal, but each winner's actual tax bill depends on their own income and tax situation.

Some lottery winners claim prizes through trusts or legal entities to maintain privacy. The tax treatment depends on the structure. A revocable trust is typically transparent for tax purposes, meaning the winner pays the same tax as if they claimed the prize directly. An irrevocable trust or corporation may have different tax consequences. A tax attorney or CPA should review the structure before you claim the prize, because the choice affects your lifetime tax liability.

Frequently Asked Questions

Can I avoid paying taxes on lottery winnings?

No. Federal tax withholding is mandatory and happens before you receive the prize. State and local taxes are also withheld in most states. You cannot refuse the withholding or claim the prize tax-free. The only way to reduce your tax burden is to choose an annuity instead of a lump sum, which may lower your overall rate by spreading income across multiple years.

What happens if I don't have enough money to pay the taxes owed at filing time?

The IRS allows payment plans for unpaid taxes. You can set up an installment agreement to pay over time, though interest and penalties accrue on the unpaid balance. Contact the IRS or a tax professional when ready if you expect to owe more than was withheld. Waiting until the important date makes the situation worse.

Do I have to pay taxes on lottery winnings from other states?

Yes. If you win a lottery in another state, you owe both that state's tax and your home state's tax in most cases. Some states have reciprocal agreements, but most do not. You may be able to claim a credit for taxes paid to the other state on your home state return, but you still owe tax somewhere. Check with a tax professional if you win out of state.

Is the 24 percent withholding the same for all lottery games?

Yes. The 24 percent federal withholding applies to Powerball, Mega Millions, state lotteries, and scratch-off tickets. The rate does not change based on the prize amount or the game. State and local withholding rates vary by location and sometimes by prize size.

Can I deduct lottery losses against my winnings?

Only if you itemize deductions on your tax return. You can deduct gambling losses up to the amount of gambling winnings you report. If you won $1 million and lost $200,000 on lottery tickets and casino visits, you can deduct the $200,000, reducing your taxable winnings to $800,000. You must keep detailed records of all losses and report them on Schedule A.