So, you actually did it. You matched the numbers. You're staring at a ticket worth millions and your heart is currently trying to exit your ribcage. It’s the dream, right? But before you go out and buy a fleet of Italian supercars or a private island in the Caribbean, there is a very large, very hungry guest at your victory party: the IRS.
Honestly, the "sticker price" of a jackpot is a total lie. If you win a $100 million Powerball jackpot, you aren't actually a $100 million winner. Not even close. When you start asking how much taxes do you pay on lottery winnings, the answer usually starts with a massive chunk disappearing before the check even hits your hand.
It’s complicated. It’s painful. And if you live in the wrong state, it’s even worse.
The Federal Government Takes the First Bite
The moment you win a prize over $5,000, the IRS considers that "gambling winning" income. They don’t wait for you to file your taxes in April to get their cut. For U.S. citizens with a Social Security number, the lottery office is legally required to withhold a flat 24% right off the top.
That’s just the withholding, though. It’s a down payment.
Because lottery winnings are treated as ordinary income, a large jackpot will instantly catapult you into the highest federal tax bracket. For the 2025 and 2026 tax years, that top rate is 37%. So, while the lottery office took 24%, you still owe Uncle Sam another 13% when tax season rolls around. If you won $10 million, the federal government is ultimately going to keep $3.7 million of it. Just like that. Gone.
If you aren't a citizen or don't provide a taxpayer ID? The withholding jumps to 30%.
The State Tax Trap
This is where it gets really localized and, frankly, kind of unfair depending on where you bought that ticket. If you bought your winning ticket in Florida, Texas, or Nevada, congratulations—you’re in a "no income tax" state. You keep way more of your money.
But buy that same ticket in New York? You’re looking at a state tax rate of 8.82%. If you live in New York City, there’s an additional local tax of about 3.876%. Between the feds and the city, you could easily lose nearly half of your entire prize before you’ve even finished your first celebratory dinner.
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Some states are surprisingly aggressive. Maryland takes 8.95%. Arizona takes 4.8%. It’s a patchwork of laws that makes your geographical location the most expensive decision you ever made. Interestingly, some states like California and Delaware don't tax state lottery winnings at all, even though they have regular income tax. It's a weird quirk of state law designed to keep lottery players from crossing borders to buy tickets elsewhere.
Lump Sum vs. Annuity: The Tax Math
You have to choose how you want the money. This is the biggest fork in the road.
The "Lump Sum" (or Cash Option) gives you all the money now, but it’s not the jackpot amount you saw on the billboard. That billboard number is the total of all 30 payments over 29 years. The cash option is just the actual cash the lottery has on hand to fund that prize. Usually, the cash option is only about 50% to 60% of the advertised jackpot.
Then you pay taxes on that smaller amount.
The "Annuity" gives you the full advertised amount, paid out over three decades. Each year, you get a check that increases by 5%. You pay taxes on each check as you receive it.
Which is better?
From a tax perspective, the annuity might actually save you money if tax rates drop in the future, or if you want to avoid the "sudden wealth syndrome" that leads people to go broke in three years. However, most financial advisors will tell you to take the lump sum. Why? Because if you invest that money wisely, the returns you get from the stock market or real estate over 30 years will likely far outpace the "extra" money the lottery gives you in the annuity. Plus, you control the money. If the government hikes the top tax rate to 50% in ten years, your annuity checks will be gutted. If you have the cash now, you can move it into tax-advantaged accounts or municipal bonds.
Hidden Costs and the "Success Tax"
People forget about the "Success Tax." No, that’s not a legal term, but it’s real.
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When you win big, your lifestyle changes. You buy a bigger house—property taxes go up. You buy a luxury car—registration fees and insurance skyrocket. You hire a legal team, a CPA, and a wealth manager. These people aren't cheap. A good tax attorney can cost $500 to $1,000 an hour. You need them, though. Without them, you’ll likely make a mistake that costs you way more in IRS penalties.
Then there’s the gift tax.
If you decide to be a hero and give your siblings $1 million each, you are technically making a taxable gift. In 2026, the lifetime gift tax exemption is slated to drop significantly (unless Congress acts) due to the sunsetting of the Tax Cuts and Jobs Act. Currently, you can give away large sums, but eventually, you hit a limit where you—the giver—have to pay a tax of up to 40% on the money you give away.
Basically, the government taxes you when you win it, and they tax you again when you try to be nice with it.
Real World Example: The $500 Million Jackpot
Let’s look at a hypothetical $500 million Powerball win in a high-tax state like New Jersey to see how much taxes do you pay on lottery winnings in reality.
- The Advertised Jackpot: $500,000,000.
- The Cash Option: Roughly $250,000,000.
- Federal Withholding (24%): $60,000,000.
- Additional Federal Tax (13%): $32,500,000.
- NJ State Tax (approx 10.75%): $26,875,000.
Total Take-Home: $130,625,000.
You "won" $500 million, but you only kept about $130 million. You lost nearly 74% of the advertised value to the cash-option reduction and the tax man. It’s still a life-changing amount of money, but it’s a far cry from half a billion dollars.
How to Protect Your Winnings
You can’t avoid the taxes entirely—don’t even try, the IRS is better at math than you are—but you can be smart.
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First, stay anonymous if your state allows it. States like Delaware, Kansas, Maryland, and several others let you remain a mystery. Why does this matter for taxes? Because the moment your name is public, every "long-lost cousin" and "charitable organization" will be at your door. Managing the requests is a full-time job.
Second, consider a Lottery Trust. By claiming the prize through a legal entity, you can sometimes manage the distribution of funds more efficiently.
Third, charitable giving. If you donate a significant portion of your winnings to a 501(c)(3) nonprofit, you can deduct that from your adjusted gross income, potentially lowering that 37% federal bill. It’s one of the few ways to keep the money out of the government’s hands while actually doing some good in the world.
Practical Next Steps for Winners
If you are holding a winning ticket right now, do not sign it yet. Stop.
Check your state’s rules. In some states, signing the back of the ticket makes it yours legally, which is good, but it might prevent you from claiming it via a trust later.
- Secure the ticket. Put it in a bank safety deposit box. Take photos of both sides.
- Hire the "Big Three." You need a tax attorney, a certified public accountant (CPA) who specializes in high-net-worth individuals, and a fee-only financial advisor.
- Change your phone number. Seriously. Do it before you claim the prize.
- Determine your "burn rate." Work with your CPA to see exactly how much you can spend per year without ever touching the principal. This ensures the 60% of the prize you actually kept lasts for the rest of your life.
- Calculate the quarterly estimated payments. Since the lottery only withholds 24%, you will owe the rest of that 37% by the next quarterly tax deadline. If you win in January and wait until the following April to pay the remaining 13%, the IRS will hit you with massive underpayment penalties.
Winning the lottery is a massive administrative task. It's a job. Treat the tax implications with the same respect you'd give a business merger, because that's essentially what it is. You are now a corporation of one, and the government is your most demanding shareholder.
Next Steps for Future Winners:
Before playing again, research if your specific state allows winners to remain anonymous. If they don't, consider buying tickets in a neighboring state that does, as this is your first and best line of defense for protecting your privacy and your new assets. Additionally, download the current year's IRS Form 1040-ES to familiarize yourself with how quarterly estimated tax payments work, as this will be your primary method of paying the "gap" between the 24% withholding and the 37% top marginal rate.