Lottery Tax Guide: What You Actually Keep After Winning

Introduction\n\nWinning the lottery can be a life-altering event, but the excitement of a massive windfall is often followed by the daunting reality of taxes. Many winners are surprised to learn that their prize is significantly smaller after the government takes its share. This guide will walk you through the ins and outs of lottery taxes, from federal and state obligations to the difference between taking a lump sum versus annuity payments. Armed with this knowledge, you can make informed decisions and keep more of your winnings.\n\n## Federal Taxes on Lottery Winnings\n\nFirst and foremost, the Internal Revenue Service (IRS) considers lottery winnings to be taxable income. This means you'll owe federal income tax on your prize, just as you would on your regular salary or other earnings. For winnings over $5,000, the lottery agency is required to withhold 24% for federal taxes before you even receive a dime [1].\n\nHowever, this 24% is just a down payment on your total tax bill. The actual amount you owe will depend on your total taxable income for the year, which includes your lottery winnings. The United States uses a progressive tax system, meaning that higher levels of income are taxed at higher rates. A large lottery prize can easily push you into the top federal income tax bracket, which is currently 37% for income over $640,601 for single filers in 2026 [2].\n\n### An Example of Federal Taxes\n\nLet's say you are a single filer with an annual salary of $60,000 and you win $1 million in the lottery. Your total taxable income for the year would be $1,060,000. Here's a simplified breakdown of how that might be taxed at the federal level, using the 2026 tax brackets for a single filer:\n\n| Tax Rate | Taxable Income Bracket | Tax Owed |\n| :--- | :--- | :--- |\n| 10% | $0 to $12,400 | $1,240 |\n| 12% | $12,401 to $50,400 | $4,560 |\n| 22% | $50,401 to $105,700 | $12,166 |\n| 24% | $105,701 to $201,775 | $23,058 |\n| 32% | $201,776 to $256,225 | $17,424 |\n| 35% | $256,226 to $640,600 | $134,531 |\n| 37% | $640,601 to $1,060,000 | $155,178 |\n| Total | | $348,157 |\n\nIn this scenario, your total federal tax bill would be approximately $348,157. The initial 24% withholding on the $1 million prize would be $240,000, so you would still owe an additional $108,157 when you file your taxes. It is crucial to set aside enough of your winnings to cover this additional tax liability.\n\n## State and Local Taxes\n\nIn addition to federal taxes, most states also tax lottery winnings. The tax rates vary significantly from state to state, ranging from a low of 2.9% in North Dakota to a high of 10.9% in New York [3]. Some states have no income tax at all, and therefore do not tax lottery winnings. There are also a few states that have an income tax but specifically exempt lottery winnings from taxation.\n\nHere is a general overview of state lottery tax policies:\n\n| States That Do Not Tax Lottery Winnings | States That Tax Lottery Winnings |\n| :--- | :--- |\n| California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming | The remaining states with a lottery |\n\nIt's important to note that even if you live in a state that doesn't tax lottery winnings, you may still be on the hook for taxes if you purchased the winning ticket in a state that does. For example, if you live in Florida but bought a winning ticket while visiting Georgia, you would owe Georgia state income tax on your prize. You can use our Odds Calculator [blocked] to see how taxes in different states might affect your potential winnings.\n\nSome cities and counties also impose their own income taxes, which could further reduce your take-home prize. Be sure to check the tax laws in your specific location to get a complete picture of your tax burden.\n\n## Lump Sum vs. Annuity Payments\n\nWhen you win a large lottery jackpot, you typically have two choices for how to receive your prize: a one-time lump sum payment or an annuity, which consists of annual payments over a period of 20 to 30 years. The choice you make has significant tax implications.\n\n* Lump Sum: If you take the lump sum, you receive a large amount of cash upfront, but it will be less than the advertised jackpot amount. All of that income is taxed in the year you receive it, which will almost certainly push you into the highest federal and state tax brackets.\n* Annuity: If you choose the annuity, you receive smaller annual payments over a long period. This spreads out your tax liability over many years, and you may end up in a lower tax bracket each year than you would with a lump sum. However, you will have to wait to receive all of your money.\n\n### Comparing the Options\n\nLet's revisit our example of a $1 million lottery winner. If the lump sum cash option is $600,000, the winner would pay taxes on the full $600,000 in one year. If the annuity option is $1 million paid over 30 years, the winner would receive approximately $33,333 per year. This would result in a much lower annual tax bill, but it would take 30 years to receive the full prize.\n\nDeciding between a lump sum and an annuity is a personal choice that depends on your financial goals and discipline. A financial advisor can help you weigh the pros and cons of each option.\n\n## Handling a Large Windfall\n\nWinning a large sum of money can be overwhelming. It is highly recommended that you assemble a team of professionals to help you manage your newfound wealth. This team should include a qualified financial advisor, a tax professional, and an attorney. They can help you create a comprehensive financial plan, minimize your tax liability, and protect your assets.\n\nIt is also a good idea to use a Bankroll Tracker [blocked] to manage your spending and ensure that your winnings last for years to come.\n\n## Conclusion\n\nWhile winning the lottery can be a dream come true, it's important to be prepared for the tax implications. By understanding how federal, state, and local taxes work, and by making smart decisions about how to receive and manage your winnings, you can ensure that your prize provides you with financial security for years to come. Remember to consult with a team of professionals to help you navigate this complex process.\n\n## References\n[1] https://www.irs.gov/taxtopics/tc419 - IRS.gov: Topic no. 419, Gambling income and losses\n[2] https://www.nerdwallet.com/taxes/calculators/lottery-tax-calculator - NerdWallet: Lottery Tax Calculator: How Taxes on Winnings Work\n[3] https://worldpopulationreview.com/state-rankings/taxes-on-lottery-winnings-by-state - World Population Review: Taxes on Lottery Winnings by State 2026