You pay taxes on lottery winnings twice: once when you claim the prize, and again on your tax return
When you win the lottery, the state or lottery operator withholds federal income tax (usually 24 percent) and state income tax (which varies by state, from zero to over 10 percent) before you ever see the money. That is the first tax payment. Then, when you file your federal tax return the following year, you owe taxes again on the full amount of your winnings—because that 24 percent withheld is almost never enough to cover what you actually owe. The IRS taxes lottery winnings as ordinary income, and depending on the size of your prize and your other income, your real tax bill can be 37 percent or higher at the federal level alone.
The second payment happens when you file your return and discover the gap between what was withheld and what you actually owe. You either send a check to the IRS, or the amount is deducted from your refund. If you won a large prize, this second bill can be substantial.
Key Takeaways
- The lottery operator withholds 24 percent federal tax and your state's income tax before paying you, which counts as your first tax payment.
- When you file your tax return, you owe taxes on the full prize amount at your actual tax bracket, which is usually higher than 24 percent.
- The difference between what was withheld and what you owe is due when you file—this is your second tax bill.
- State income tax rates vary: some states have no lottery tax, while others take over 10 percent, and this amount is withheld upfront.
- Lump-sum prizes and annuity payments are taxed differently, and choosing between them affects your total tax burden over time.
What happens at the lottery counter when you claim your prize
When you present your winning ticket, the lottery operator calculates your prize and when ready withholds taxes before handing you a check. Federal withholding is set by law at 24 percent for prizes over $5,000. Your state also withholds its income tax at that moment—the rate depends on where you live and where you bought the ticket.
For example, if you win $1 million in a state with 5 percent income tax, the lottery withholds $240,000 in federal tax and $50,000 in state tax. You receive a check for $710,000. This withholding is not optional, and it is not a loan—it goes directly to the IRS and your state revenue department. You have now made your first tax payment, but you have not finished paying taxes on this prize.
The second tax bill arrives when you file your return
The 24 percent federal withholding is a flat rate that the IRS uses as a placeholder. It does not account for your actual tax bracket, which depends on your total income for the year—including the lottery winnings, your salary, investment income, and anything else you earned. For large prizes, your real federal tax rate is almost always higher than 24 percent.
When you file your tax return, you report the full prize amount as income. The IRS calculates what you actually owe based on your bracket. If you won $1 million and your total income puts you in the 37 percent federal bracket, you owe $370,000 in federal tax. Since only $240,000 was withheld, you owe an additional $130,000 when you file. This is your second tax payment.
Some states also true up their withholding on your state return. If your state withheld less than you owe, you pay the difference. If it withheld more, you may receive a refund, though this is less common with large prizes.
Lump-sum versus annuity: how the choice affects your taxes
Most lotteries offer two payout options: a lump sum (a single payment of the advertised prize) or an annuity (annual payments over 20 to 30 years). The choice affects how much you pay in taxes overall, because taxes are calculated on what you receive each year.
With a lump sum, you receive the full amount in one year, which pushes your income into the highest tax brackets when ready. You pay the most in taxes upfront. With an annuity, you receive smaller payments each year, which may keep you in a lower bracket for some years. Over the life of the annuity, you may pay less in total federal tax—but you also receive less money overall because the annuity payments are smaller than the lump-sum amount.
Both options are subject to the same withholding and filing process: the lottery withholds taxes on each payment (or on the lump sum), and you report the income on your return each year. The annuity does not avoid the two-tax-payment structure; it just spreads the second bill across multiple years.
State income tax varies widely and is withheld upfront
State income tax on lottery winnings ranges from zero to over 10 percent, depending on where you live. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire. If you live in one of these states and win the lottery there, you owe no state income tax on your prize, though you still owe federal tax.
If you live in a state with income tax but won the lottery in a state without it, you still owe income tax to your home state—most states tax lottery winnings regardless of where the ticket was purchased. The lottery operator withholds the tax of the state where the ticket was sold, so you may owe additional tax to your home state when you file, or you may receive a credit for taxes already paid.
The state withholding happens at the lottery counter, just like federal withholding. You cannot avoid it or defer it. It is part of your first tax payment.
Why the second tax bill surprises most winners
Many lottery winners are shocked to discover they owe more taxes after receiving their check. This happens because 24 percent federal withholding is designed to cover average tax situations, not large windfalls. A lottery prize is added to your other income for the year, and the combination often puts you in a much higher tax bracket than you would normally occupy.
For example, if you earn $50,000 a year and win $500,000, your total income is $550,000. Your marginal federal tax rate on that combined income is much higher than 24 percent. The IRS expects you to pay the difference when you file.
Some winners also face an additional federal tax called the Net Investment Income Tax (3.8 percent) if their total income exceeds certain thresholds. This is a third layer of federal tax, though it is technically part of your second bill, not a separate payment.
Planning ahead to avoid a large bill at tax time
If you know you will owe a substantial amount when you file, you can make estimated tax payments to the IRS before your return is due. This spreads the cost across the year and may help you avoid penalties for underpayment. You can also work with a tax professional to understand your exact liability before you claim your prize, so there are no surprises.
Some winners set aside a portion of their after-tax winnings in a separate account to cover the second tax bill. If you received $710,000 after withholding on a $1 million prize, setting aside $130,000 to $150,000 for federal taxes (and any state taxes due) is a reasonable precaution.
You cannot reduce the amount of tax you owe on lottery winnings through deductions or credits—lottery income is taxed as ordinary income with no special treatment. The only way to lower your tax bill is to choose an annuity instead of a lump sum, which spreads the income across multiple years and may result in a lower overall federal tax rate.
Frequently Asked Questions
Do I have to pay taxes on lottery winnings if I won in a state with no income tax?
You still owe federal income tax on lottery winnings, regardless of where you won. States with no income tax (like Florida, Texas, and Nevada) do not tax lottery prizes, but the IRS does. Federal withholding of 24 percent happens automatically, and you owe the balance when you file your federal return.
What if I won the lottery in one state but live in another?
The lottery operator withholds the income tax of the state where the ticket was sold. If you live in a state with a higher income tax rate, you may owe additional tax to your home state when you file your state return. Some states offer credits for taxes paid to other states, but not all do—check with your state revenue department.
Can I avoid the second tax bill by spreading my winnings across multiple years?
No. You must report the full prize amount in the year you won it, regardless of how you receive the money. If you choose an annuity, you report each annual payment as income in the year you receive it, which spreads your tax bill across multiple years but does not eliminate it. A lump sum requires you to report and pay taxes on the full amount in one year.
Is the 24 percent withholding my final tax bill?
No. The 24 percent is a placeholder withholding that the IRS requires. Your actual federal tax rate on lottery winnings is usually higher, often 37 percent or more depending on your total income. You pay the difference when you file your tax return.
Do I need to hire a tax professional to handle lottery winnings?
It is not required, but it is strongly recommended for large prizes. A tax professional can help you understand your total liability, plan for the second tax bill, decide between a lump sum and annuity, and identify any additional taxes (like the Net Investment Income Tax) that may explore to your situation.