Lottery winnings are taxed as ordinary income at the federal level, with a flat 24% withheld upfront on prizes of $5,000 or more. But 24% is rarely the full story. Most big winners owe significantly more when they file their tax return, because the top federal income tax bracket is 37%. State taxes can add another 0% to nearly 13% on top of that, depending on where you live.
Federal Withholding vs. What You Actually Owe
When you win $5,000 or more from a lottery, the organization paying your prize is required to withhold 24% for federal taxes before handing you the money. You’ll receive a Form W-2G documenting the winnings and the amount withheld. That 24% is not a final tax bill. It’s more like an estimated payment sent to the IRS on your behalf.
Your actual tax rate depends on your total taxable income for the year, which includes the lottery winnings plus any wages, investment income, or other earnings. A multimillion-dollar jackpot pushes virtually every winner into the top federal bracket, where all dollars above $578,125 in taxable income are taxed at 37%. That means a winner who had 24% withheld still owes the IRS the difference between 24% and their true marginal rate when they file. On a $10 million prize, that gap can easily run into seven figures.
Smaller prizes below $5,000 don’t trigger automatic withholding, but they’re still taxable. You’re responsible for reporting them on your return and paying any tax owed.
State Taxes on Lottery Winnings
Most states with a lottery also tax the winnings, and the rates vary widely. Some states withhold nothing: a handful have no state income tax at all, and a few others (like California, Delaware, and Pennsylvania) exempt lottery winnings from state withholding. At the other end, state and local withholding can exceed 12% in certain jurisdictions.
Withholding rates across the states that do tax lottery winnings generally fall between 3% and 9%. As with federal taxes, the amount withheld may not match your final state tax liability. If your state has a graduated income tax, a large prize could push you into a higher bracket than the standard withholding rate assumes. You’ll settle the difference when you file your state return.
If you buy a ticket in a state other than where you live, both states may have a claim on part of the winnings. Most states offer credits to prevent full double taxation, but the details depend on the specific states involved.
Lump Sum vs. Annuity: Tax Differences
When you win a major jackpot, you typically choose between a lump sum (a single, smaller cash payment) or an annuity (the full advertised amount paid out in annual installments over 20 to 30 years). Both options are taxed as ordinary income, but the timing changes the math considerably.
A lump sum concentrates all the income into one tax year. If you take a $200 million cash payout, nearly all of it lands in the 37% bracket that year. An annuity, by contrast, spreads the income across decades. Each annual payment is still taxable in the year you receive it, but the smaller yearly amounts may keep more of your money in lower brackets. For a $400 million advertised jackpot, the annuity might pay roughly $13 million to $15 million per year. That’s still deep in the top bracket, but substantially less of the total sits there compared to taking the entire lump sum at once.
The tradeoff isn’t purely about tax rates. Lump-sum winners get access to the money immediately and can invest it, while annuity recipients give up that flexibility in exchange for a larger gross payout and somewhat lower annual tax exposure.
Non-U.S. Citizens Face a Higher Rate
If you’re a nonresident alien who wins a U.S. lottery prize, the IRS withholds 30% rather than the standard 24%. This flat rate applies to what the IRS calls “fixed, determinable, annual, or periodical” income, a category that includes gambling winnings. No deductions are allowed against this income. If your home country has a tax treaty with the United States, the rate may be reduced, but 30% is the default.
How to Estimate Your Total Tax Bill
To get a rough sense of what you’d owe on a large prize, start with the federal layer. Take the cash value of the prize (not the advertised jackpot, which reflects the annuity total), subtract the standard deduction, and apply the marginal tax brackets. Everything above roughly $578,125 in taxable income hits the 37% rate. Then add your state’s withholding or income tax rate on top.
For a $1 million cash prize, you might expect roughly $370,000 in federal tax (after deductions push a small portion into lower brackets) plus whatever your state charges. The 24% withheld at the time of payment covers about $240,000, leaving you responsible for roughly $130,000 more at tax time, before state taxes.
For a $100 million cash prize, federal taxes alone approach $37 million. The 24% withheld ($24 million) falls well short, and you’d owe the remaining $13 million or so when you file, plus state taxes. The IRS expects you to make estimated quarterly tax payments if your withholding won’t cover your liability, so setting aside a large portion of the winnings immediately is essential to avoid underpayment penalties.