If you’re one of the millions of people who play the lottery, you probably just think about what you’ll do with all the money if you win. However, if you’re lucky enough to win big in Powerball, Mega Millions, or another lottery, there’s something else you’ll need to think about: Taxes.
The federal and most state governments consider lottery winnings to be taxable income—they are taxed as ordinary income, just like the income you earn from a job. How much tax you’ll have to pay on your winnings depends on your total income and the state where you live.
As a rule of thumb, you can expect to lose almost half of your winnings to taxes. That means that after taxes, the winners of, for example, a $1.5 billion Mega Millions lottery will walk away with a mere $250,000,000 each.
Annuity or Lump Sum?
Lottery winners have the option of taking their winning in a one-time lump sum payment, or having them paid in the form of an annuity. With an annuity you’re paid a little at a time over many years, anywhere from 20 to 40 years. For example, let's say you just won a million dollars in the Powerball lottery. If you select the annuity option, you’ll be paid $33,333 per year for 30 years. However, you’ll have to pay income tax on the payments each year.
If you take your money in a lump sum, you’ll receive a single payment of $620,000—this is equal to the present cash value of the 30-year annuity. However, after taxes, you’ll be left with only about $375,000. In fact, it’s about one-third of the promised million dollars.
You’ll can save on taxes by taking an annuity because, depending on your other income and the annuity amount, it might not be subject to the top income tax rate (currently, 37%). A large lump-sum payment would be taxed at the highest rates.
What About State Taxes?
Not only do you have to pay taxes to the federal government on your lottery winnings, you may also need to pay state income taxes as well. Not all states tax lottery winnings. They are tax free in California, Texas, Florida, South Dakota, Wyoming, Washington, New Hampshire, and Tennessee.
As a general rule, if you live in one state and win a lottery in another, you're first taxed by the state where you bought the lottery ticket. Then, if your home state has the same or a lower tax rate than the other state, you won't have to pay taxes in your state. If your state's tax rate is higher, you'll get a "credit" for the taxes you paid to the other state and pay the difference to your state. In some states, state tax rates on lottery winnings differ for residents and nonresidents.
Income Tax Withholding
Lottery winnings over $5,000 are subject to both federal and state income tax withholding—this is, part of your winnings are automatically paid to the IRS and state tax agency by the state lottery agency. The lottery agency must withhold 24% of your winnings for federal income taxes. How much is withheld for state income taxes varies from state to state, ranging from approximately around 3% to 9%. If you’re paid an annuity, the withholding is taken out of each check.
Although 24% federal withholding might seem like a lot, if you win big, it might not cover your total tax liability. The top federal tax rate is 37%, way more than 24%. This rate applies to individuals with over $626,350 ($751,600 for married couples filing jointly) (2025). So, big winners who take lump-sum payments could end up owing taxes even after 24% is withheld from their winnings. You should set some of your money aside to pay these taxes.
Changes in 2026 will raise some gambling reporting thresholds to $2,000 for certain games, though this might not apply to traditional lotteries.
IRS Reporting
Lottery winnings over $600 are reported to the IRS by the lottery agency using IRS Form W-2 G, Certain Gambling Winnings. This is an information return used just for gambling. It will show the amount of your winnings and the amount of any tax that was withheld. The lottery agency will send a copy of the form to the IRS and your state tax department. You file copies with your federal and state income tax returns.
Group Winners
Many people purchase lottery tickets as a group, such as an office lottery pool. However, in most states only one person can be named as the payee on the lottery ticket. This person should not claim the lottery winnings as an individual and then distribute them to the other members of the pool. Doing so could make them individually liable for the entire tax due on the winnings. Moreover, gift taxes might have to be paid when this person distributes the pool members their shares.
To avoid these calamities, the members of the pool should form a legal entity such as a partnership, limited liability company, or trust to claim and distribute the prize. Each pool member will then pay their share of tax on the distributions.
Gift Taxes
Many big lottery winners give away substantial sums to friends and family. There is nothing wrong with this. However, you should be aware that a federal 40% gift tax applies to some types of gifts you make while you’re alive. You, the giver, must pay this tax, not the person who receives the gift.
Fortunately, it’s easy to avoid this tax. You can give away up to $13.99 million (2025) to people other than your spouse (if any) before you become subject to the estate and gift tax at your death. Moreover, you can give up to $19,000 per year (2025) to as many individuals as you want without it counting against the $13.99 million exemption.
A Tax Lawyer Might Be Able to Help
If you have questions about how winnings are taxed, consider talking to a tax attorney or another tax professional, such as a certified public accountant.