You pay taxes on lottery winnings once, when you receive them—not every year after

The federal government taxes lottery winnings as ordinary income in the year you win. You do not owe federal income tax on the same winnings again in future years. However, if your lottery prize is structured as an annuity that pays out over multiple years, you will owe federal tax each year you receive a payment, because each payment counts as income for that tax year.

Most lottery winners face an when ready tax hit: the lottery operator withholds 24 percent of the prize for federal taxes before you ever see the money. Depending on your total income and tax bracket, you may owe more when you file your return. Some states also tax lottery winnings, and a few cities do as well.

Key Takeaways

  • Lottery winnings are taxed as ordinary income in the year you receive them, not in subsequent years.
  • The lottery operator automatically withholds 24 percent of your prize for federal taxes, but your actual tax bill may be higher depending on your tax bracket.
  • If you choose an annuity payout spread over 20 or 30 years, you owe federal tax on each annual payment as you receive it.
  • State and local taxes on lottery winnings vary widely—some states tax them at rates up to 10 percent, while others do not tax them at all.
  • You must report lottery winnings on your federal tax return even if the lottery operator already withheld taxes.

How the federal withholding works

When you claim a lottery prize, the lottery operator is required by federal law to withhold 24 percent of the winnings for the IRS. This withholding happens automatically—you do not have a choice. If you win $1 million, the lottery will set aside $240,000 for federal taxes and give you $760,000.

This 24 percent withholding is not your final tax bill. It is a prepayment toward your taxes. When you file your federal income tax return for that year, the IRS calculates what you actually owe based on your total income and your tax bracket. If you fall into a higher tax bracket because of the lottery winnings, you may owe additional tax beyond the 24 percent that was withheld. If the withholding exceeds what you owe, you receive a refund.

Lump sum versus annuity payouts

Most lotteries offer two payout options: a lump sum paid when ready, or an annuity paid in installments over 20 to 30 years. The choice affects when and how you pay taxes.

If you take the lump sum, you receive the full after-tax amount in one payment, and you owe federal tax only on that amount in that single year. The lottery withholds 24 percent upfront. If you choose the annuity, the lottery makes annual payments to you over decades. You owe federal tax on each annual payment in the year you receive it, not on the entire prize upfront. This can spread your tax liability across multiple years and potentially keep you in a lower tax bracket each year, though the total tax you pay over time may be higher because of how tax brackets work.

State and local lottery taxes

Federal tax is only part of the picture. Most states that run lotteries also tax lottery winnings. State tax rates vary significantly. Some states, like Florida and Texas, do not tax lottery winnings at all. Others, like New York, tax them at rates around 8 to 10 percent. A few cities, including New York City, add their own local tax on top of state tax.

The lottery operator does not automatically withhold state taxes. You are responsible for paying them when you file your state income tax return. Some lottery winners are surprised to discover they owe state tax on top of the federal withholding, which can substantially reduce the amount they actually keep.

Reporting lottery winnings on your tax return

You must report all lottery winnings on your federal tax return, even if the lottery operator already withheld 24 percent. The lottery will send you a Form W-2G (Certain Gambling Winnings) if your prize is large enough, typically $600 or more. You report the full amount of winnings on your return, and the IRS credits you for the federal withholding that already occurred.

If you won through an annuity, you will receive a Form W-2G each year for that year's payment. Report each annual payment on the tax return for the year you received it. Do the same for state taxes: report the full amount of winnings on your state return and pay any state tax owed.

What happens if you win a smaller prize

Lottery prizes under $600 generally do not trigger automatic federal withholding or a Form W-2G. However, you are still legally required to report them as income on your federal tax return. Many people do not realize this and fail to report small wins, which can create problems if the IRS audits your return.

Scratch-off tickets and smaller drawings follow the same rule: any winnings are taxable income. Keep records of all lottery tickets and winnings, even small ones, so you can accurately report them when you file.

Deducting lottery losses

If you play the lottery regularly and lose money overall, you cannot deduct those losses from your lottery winnings to reduce your tax bill. The IRS treats lottery winnings and losses separately. You report the full amount of winnings as income. Gambling losses can only be deducted if you itemize deductions on your tax return, and only up to the amount of gambling winnings you reported that year.

This is why lottery winnings can create a large unexpected tax bill: you owe tax on the full prize amount, but you cannot offset it with losses from other lottery tickets or casino visits.

Planning ahead for a large win

If you win a substantial lottery prize, consider consulting a tax professional or financial advisor before you claim it. They can help you understand your total tax liability, decide between a lump sum and annuity, and plan for state taxes. Some winners benefit from spreading the income across multiple years through an annuity, while others prefer the lump sum and the certainty of a single tax bill.

You should also be aware that a large lottery win can affect other aspects of your finances—your may be able to access for certain tax credits, your Medicare premiums if you are retired, or your student loan repayment obligations if you have federal loans. A professional can help you navigate these complications.

Frequently Asked Questions

Do I owe taxes on lottery winnings every year after I win?

No. You owe federal tax only on the year you receive the winnings. If you choose an annuity payout, you owe tax each year on the payment you receive that year, but that is because each payment is new income, not because you are being taxed twice on the same prize.

What if I won the lottery in another state?

You owe federal tax regardless of where you won. You may also owe tax to the state where you won, depending on that state's laws. Some states tax non-residents' lottery winnings; others do not. Check the tax rules of the state where you purchased the ticket.

Can I reduce my lottery tax bill by donating the winnings to charity?

You still owe tax on the full amount of the winnings. However, if you itemize deductions on your tax return, you can deduct charitable donations you make. This can reduce your overall tax liability, but it does not eliminate the tax on the lottery winnings themselves.

What if the lottery withheld more than I actually owe in taxes?

You will receive a refund when you file your tax return. The IRS calculates your actual tax liability based on your total income and circumstances, and credits you for the 24 percent that was withheld. If the withholding exceeds what you owe, the difference is refunded to you.

Do I have to claim my lottery prize, or can I stay anonymous?

That depends on your state's lottery laws. Some states allow winners to claim prizes through trusts or legal entities to maintain privacy. However, you still must report the winnings on your tax return—anonymity does not change your tax obligation. Consult a lawyer in your state to understand your options.