You just won. The numbers on your ticket match the glowing balls on the TV screen, and for a fleeting, beautiful second, you are a multimillionaire. Then, reality sets in. Before you can even buy that private island or a fleet of vintage Porsches, Uncle Sam wants his cut.
It’s the question that haunts every office pool and gas station daydream: How much tax is taken out of lottery winnings? Honestly, it’s a lot more than most people expect. Most winners don't walk away with the "advertised" jackpot. They walk away with a fraction.
The Immediate Bite: Federal Withholdings
The IRS doesn't wait for you to file your taxes in April to get their money. No way. The moment you hand over that winning ticket to the lottery commission, the federal government treats it like a massive paycheck.
For U.S. citizens and residents with a Social Security number, the lottery office automatically withholds a flat 24% for federal taxes. If you’re a non-resident alien, that jump-starts to a staggering 30%. Think of it as a mandatory tip to the government just for the privilege of being lucky.
But here’s where people get tripped up: 24% is just the "cover charge."
Winning a massive jackpot almost certainly puts you in the highest federal income tax bracket. For the 2025 and 2026 tax years, that top rate is 37%. So, while the lottery office took 24% off the top, you still owe the IRS another 13% when you actually file your return. If you won $100 million, that extra 13% is $13 million you need to have sitting in a bank account, or you’re going to have a very stressful conversation with a federal auditor.
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The State-Level Tax Lottery
Where you live—or more specifically, where you bought the ticket—matters immensely. Some states are incredibly friendly to winners. Others? Not so much.
If you bought your ticket in Florida, Texas, South Dakota, Wyoming, Washington, Tennessee, Nevada, or New Hampshire, you’re in luck. These states don't have a state income tax on lottery winnings. You basically get to skip that second layer of taxation.
On the flip side, if you’re a winner in New York or Maryland, prepare for a haircut. New York state takes 8.82%, and if you’re lucky (or unlucky) enough to live in New York City, the city takes another 3.876%. Maryland isn't much better, hitting residents with an 8.95% tax.
It’s a bizarre geographical quirk. A $10 million winner in Orlando walks home with significantly more cash than a $10 million winner in Manhattan.
The Lump Sum vs. Annuity Trap
This is the big one. This is where the "advertised" jackpot dies.
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When you see a Powerball jackpot advertised at $500 million, that number represents the total of 30 payments over 29 years—the annuity option. If you want all that cash right now, you have to take the "cash value," which is the actual money currently in the prize pool.
Usually, the cash option is about half of the advertised jackpot.
Let's look at a hypothetical $1 billion jackpot. If you take the cash, it might only be $500 million. Then you apply the taxes. After the 37% federal bite and a mid-range state tax of 5%, that $1 billion dream has suddenly shrunk to roughly $290 million. Still a fortune? Absolutely. But it’s less than 30% of what was printed on the billboard.
Choosing the annuity can actually be a smarter tax play for some. It spreads the tax liability over three decades. Plus, it protects you from yourself. We’ve all heard the stories of "lottery ruins life" winners who blow $50 million in two years. An annuity ensures you have a massive "allowance" every year until you're old.
Can You Lower the Bill?
You can't really "evade" lottery taxes, and trying to will just land you in a windowless room with people wearing badges. However, there are legitimate ways to soften the blow.
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Gifting and Pools
If you won as part of an office pool, make sure there is a written agreement before the draw. If one person claims the whole prize and then hands out cash to the coworkers, the IRS might view those as "gifts." You could end up paying income tax on the win, and then your coworkers could be hit with gift taxes on the money you give them. It's double taxation at its worst.
Charitable Contributions
Giving to charity is the classic way to lower a tax bill. If you win $100 million and give $10 million to a 501(c)(3) nonprofit, you can deduct that from your taxable income. It doesn't make the tax go away entirely, but it ensures that more of your money goes to a cause you care about rather than the general treasury.
The Gambling Loss Offset
This is a weird one. You can deduct gambling losses up to the amount of your winnings. If you spent $1,000 on losing tickets throughout the year, you can technically deduct that $1,000 from your $100 million win. It’s a drop in the bucket, but hey, every dollar counts. You just have to keep the receipts. Seriously, keep the losing tickets.
Practical Steps for the Suddenly Wealthy
If you find yourself holding a ticket that answers the question of how much tax is taken out of lottery winnings with "tens of millions," do not go to the lottery office tomorrow.
- Sign the back of the ticket. In most states, that ticket is a "bearer instrument." Whoever holds it, owns it.
- Go silent. Delete your social media. Don't tell your cousin. Don't tell your boss yet.
- Hire a "Triad." You need a tax attorney, a Certified Public Accountant (CPA) who specializes in high-net-worth individuals, and a fee-only financial advisor.
- Decide on your "Legacy." If you want to remain anonymous, check your state laws. Some states like Delaware or South Carolina allow it; others, like California, require your name and city to be public record.
The math is brutal, but the remaining sum is life-changing. Just remember that the IRS is your first and most persistent partner in your new fortune. Treat them with respect, pay them their 37%, and enjoy the rest of your life.
Actionable Insights
- Calculate the "Net-Net": Before making any lifestyle changes, multiply the "Cash Option" by 0.60. This gives you a rough, safe estimate of what you’ll actually keep after federal and state taxes.
- Establish a Trust: Work with an attorney to see if you can claim the prize through a legal entity or trust to protect your privacy and potentially manage future estate taxes.
- Quarterly Estimates: Since the initial 24% withholding won't cover your full 37% liability, you must make an estimated tax payment to the IRS shortly after winning to avoid massive underpayment penalties the following year.