How Much Tax Do You Pay on Lottery Winnings?
Last reviewed: July 2026
Lottery winnings tax works like this: the IRS treats your prize as ordinary income, taxes it at your marginal rate of up to 37%, and the lottery commission withholds 24% upfront before you ever see the check. Add state and sometimes local taxes, and the advertised jackpot shrinks fast. On a large prize, you might keep 40% to 60% of the headline number. The good news is that smart planning, done before you claim, can move that needle in your favor.
Key Takeaways
- Lottery winnings are taxed as ordinary income, with a federal top rate of 37% in 2026.
- The 24% federal withholding is not your final bill; large prizes owe the difference at tax time.
- Eight states levy no income tax on lottery winnings, while some take 10% or more.
- The lump sum versus annuity choice changes your tax exposure and your investing flexibility.
- Charitable giving and trust planning can reduce both income and estate taxes on a windfall.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate sudden windfalls and major financial transitions since earning his CFP® certification in 2013, by using Chesapeake Financial Planners’ signature process, the R.U.D.D.E.R. method™. Jeff's first piece of advice to a new lottery winner is always the same: do nothing public for 30 days, because the worst tax mistakes happen in the first week.
What Counts as a Lottery Winnings Tax?
A lottery winnings tax is not a separate tax with its own rate. It refers to the ordinary income tax you owe on prize money, calculated at your marginal federal rate plus any state and local income taxes that apply.
The IRS treats gambling and lottery winnings as fully taxable income. That means your prize stacks on top of your other income for the year and is taxed at whatever bracket it lands in. A multimillion-dollar prize will push almost anyone into the top federal bracket of 37% in 2026.
Here is where most winners get surprised. For prizes over $5,000, the lottery commission withholds 24% for federal taxes before paying you. People treat that 24% as the whole bill. It is not. It is a down payment. If your prize lands you in the 37% bracket, you still owe the gap between 24% and 37% when you file. On a $10 million win, that gap is real money, and the IRS expects it in April.
Jeff Judge has seen this exact mistake cost clients their footing. Someone wins, sees 24% withheld, spends as if the rest is clean, and then faces a seven-figure balance the following spring. The fix is simple but unglamorous: set aside the difference the day the money lands.
How Do State and Local Taxes Affect Your Winnings?
State taxes can take a big bite or none at all, depending entirely on where you live when you claim. Eight states impose no state income tax, so lottery winners there owe only federal tax.
According to the Tax Foundation, states with no individual income tax include Florida, Texas, Washington, Nevada, South Dakota, Wyoming, Alaska, and Tennessee. Win in one of those and your state liability is zero. Other states reach double digits. California is a notable exception that does not tax lottery winnings at the state level, while New York, New Jersey, and Maryland tax them at full ordinary rates.
Local taxes can stack on top. New York City, for instance, adds its own municipal income tax on residents, which lands on top of state and federal. And if you buy a ticket in one state but live in another, you may owe tax to both, with your home state typically giving a credit for what you paid the other. This is exactly the kind of cross-border situation worth running by a tax professional before you cash anything. For a deeper look at how your bracket interacts with stacked income, see What Is the Difference Between Marginal and Effective Tax Rate?.
Should You Take the Lump Sum or the Annuity?
The lump sum versus annuity decision changes both your tax exposure and your control over the money. The lump sum delivers roughly 50% to 70% of the advertised jackpot now, all taxed in one year. The annuity spreads payments over decades, taxing each installment as you receive it.
| Factor | Lump Sum | Annuity |
|---|---|---|
| Timing of payment | One payment now | 29-30 annual payments |
| Amount received | ~50-70% of advertised jackpot | Full advertised jackpot over time |
| Tax year | All taxed in year of receipt | Taxed each year as received |
| Bracket effect | Pushes you to top bracket immediately | May keep you in lower brackets some years |
| Investment control | Full control to invest now | Limited; payments are fixed |
| Protection from overspending | None | Built-in spending discipline |
From a pure tax angle, the annuity can lower your lifetime tax if rates stay flat or rise, because spreading income out can keep you out of the very top bracket in some years. But the lump sum gives you the full balance to invest immediately, and disciplined investment growth often outweighs the annuity's tax smoothing. The honest answer is that this depends on your discipline, your time horizon, and your read on future tax rates. It is a decision to make with your CPA and advisor, not on gut feeling. The same windfall logic applies whether the money comes from a lottery or an inheritance; see How will inheriting money affect my taxes this year?.
What Strategies Reduce Lottery Winnings Tax?
You cannot make lottery winnings tax-free, but several legitimate moves reduce the total you owe across income and estate taxes. The most powerful ones happen before you claim or in the same tax year you receive the money.
Claim from a tax-friendly state. If you can establish genuine residency in a no-tax state before claiming, you can erase the state portion entirely. The catch is that you need real residency, not a mailing address. States audit lottery winners aggressively, so this only works with a license, voter registration, a home, and real time spent there.
Give strategically with a donor-advised fund. If charity is already part of your plan, contributing appreciated assets or cash to a donor-advised fund in your big-income year locks in a deduction now while letting you grant to charities over time. The IRS allows cash contributions to public charities to be deducted up to 60% of adjusted gross income.
Use a charitable remainder trust for large gifts. A charitable remainder trust lets you donate assets, take a partial deduction, receive income for life, and send the remainder to charity. It is complex, but for a major windfall it can pair tax savings with the causes you care about.
Plan for estate tax with a trust. If your winnings push your estate above the federal estate tax exemption of $15 million per individual in 2026, a properly structured trust can reduce or eliminate estate taxes later. Generation-skipping provisions can pass wealth to grandchildren without a tax hit at each generation.
At Chesapeake, we run windfall decisions through the R.U.D.D.E.R. Method™, our six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. For a lottery winner, the "Review and Recognize" step alone, taken before claiming, is often where the biggest dollars are saved. For more on managing the money after the windfall, see How Should I Place Investments Across Taxable and Retirement Accounts? and What Tax Mistakes Do Lottery Winners Make That Cost Millions?. Jeff Judge notes: "With a lottery windfall, the decisions made in the days before you claim the ticket are often worth more than anything we can do for you afterward, which is why we want to talk before you walk into that lottery office."
Frequently Asked Questions
How much federal tax do you pay on lottery winnings?
Federal tax on lottery winnings can reach 37%, the top marginal rate in 2026, because the IRS treats prizes as ordinary income. The lottery commission withholds 24% upfront on prizes over $5,000, but that withholding is only a partial payment. You owe the difference between 24% and your actual bracket when you file your return.
Is the 24% lottery withholding the only tax I owe?
No, the 24% federal withholding is rarely your final tax bill on a large prize. It is a partial prepayment. Because a big jackpot usually pushes you into the 37% federal bracket, you typically owe an additional 13 percentage points at filing time, plus any state and local income tax that applies where you live.
Which states do not tax lottery winnings?
Eight states levy no individual income tax, so lottery winners there owe no state tax: Florida, Texas, Washington, Nevada, South Dakota, Wyoming, Alaska, and Tennessee. California is also notable because it does not tax lottery winnings at the state level, even though it taxes other income. You still owe federal tax everywhere in the country.
Is a lump sum or annuity better for taxes?
An annuity can lower lifetime taxes by spreading income across many years and keeping you out of the top bracket some years, while a lump sum is taxed entirely in one year. The lump sum, though, gives you the full balance to invest immediately. The right answer depends on your discipline, time horizon, and view of future tax rates.
Can I avoid taxes on lottery winnings by giving to charity?
You cannot avoid income tax on the winnings themselves, but charitable giving can reduce your taxable income substantially. Contributing to a donor-advised fund in your high-income year lets you deduct up to 60% of adjusted gross income for cash gifts. A charitable remainder trust can pair a partial deduction with lifetime income for very large gifts.
Will lottery winnings affect my estate taxes?
Yes, a large prize can push your estate above the federal estate tax exemption of $15 million per individual in 2026, exposing the excess to estate tax. A properly structured trust, including generation-skipping provisions, can reduce or eliminate that exposure and pass wealth to future generations without a tax hit at each step.
If you have come into a windfall and want a clear picture of what you actually keep, our free windfall planning guide walks through the first 90 days step by step. Download it at chesapeakefp.com.
Want to go deeper? Our First 90 Days After a Windfall walks through this step by step.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
