You just won. Your heart is pounding, your hands are shaking, and you’re staring at a piece of paper worth $500 million. It's the dream. But before you go out and buy a private island or a fleet of vintage Ferraris, there’s a massive, uninvited guest waiting at the finish line: the Internal Revenue Service.
Seriously.
Understanding what is the tax on winning the lottery is usually the last thing on a winner's mind, but it’s the most important math you'll ever do. Most people think if they win a million, they get a million. Nope. Not even close. Between federal withholdings, state levies, and the choice between a lump sum or an annuity, that "jackpot" number on the billboard is basically a marketing hallucination.
The Immediate Bite: Federal Withholding vs. Actual Tax Bill
When you walk into the lottery office to claim a big prize, the government doesn't wait for tax season to get paid. They take their first bite right at the counter. For U.S. citizens and residents with a Social Security number, the IRS requires a mandatory 24% federal withholding on any gambling winnings over $5,000.
That sounds high. But here’s the kicker: it’s actually not enough.
The 24% is just a down payment. Because a massive lottery win will almost certainly catapult you into the highest federal income tax bracket—which is currently 37% for individuals earning more than $609,350 (or $731,200 for married couples)—you’re going to owe the IRS another 13% when you file your return the following April. If you don't set that extra cash aside, you are going to have a very bad time with an auditor.
Think about it this way. On a $100 million win, the lottery sends $24 million to the IRS immediately. You take your $76 million and start spending. Then, come April, the IRS taps you on the shoulder and asks for the other $13 million. If you've already spent it on mansions and crypto, you’re in deep trouble.
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The Lump Sum Trap
You have a choice. You can take the "Cash Option" (the lump sum) or the "Annuity" (30 payments over 29 years).
Most people take the cash. Why? Because we want it now. But the "Jackpot" advertised on TV is the sum of those 30 payments, which includes interest earned over three decades. The actual cash on hand is much lower. For a $1 billion jackpot, the cash value might only be $500 million.
Then you apply the 37% federal tax.
Then you apply state taxes.
Suddenly, your billion-dollar headline has shriveled into about $300 million. Still a lot of money? Absolutely. But it’s a far cry from ten figures.
Where You Live Matters (A Lot)
If you’re lucky enough to live in Florida, Texas, or Nevada, give yourself a pat on the back. These states don't have a state income tax. That means you only worry about the federal government.
But if you bought that ticket in New York City? You’re getting hit from three different directions. New York State takes a chunk, and New York City takes its own specific municipal tax. In some parts of the country, you could be looking at a total tax hit—federal, state, and local—that approaches 50% of your total winnings.
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States that take the biggest bite:
- New York: Often the highest, with state rates around 8.82% plus local taxes.
- Maryland: They take about 8.75% for residents.
- New Jersey: They’ll grab about 8% on large windfalls.
On the flip side, states like California and Delaware actually don't tax lottery winnings at the state level, even though they have regular income taxes. It’s a weird quirk of local law that can save a winner millions of dollars depending on which side of a state line they bought their ticket.
Why the "Annuity" Might Be Smarter (Even If It’s Boring)
Most financial advisors will tell you to take the lump sum and invest it. The logic is that you can beat the lottery’s internal interest rate by playing the stock market.
But there’s a psychological and tax-related counter-argument.
When you take the annuity, you are taxed on the amount you receive each year. If tax rates drop in the future, you might pay less overall. More importantly, it protects you from yourself. We’ve all heard the stories of "Lottery Ruin"—the winners who go broke in three years because they bought everyone they knew a house. With an annuity, you get a "do-over" check every year for 30 years. Even if you blow Year 1, Year 2 is coming to save you.
Don't Forget the "Gifting" Tax
This is the one that catches people off guard.
The moment you win, you’ll probably want to give $1 million to your mom, $500k to your brother, and $100k to your best friend from high school. Here’s the problem: the IRS views those as gifts.
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As of 2026, you have an annual gift tax exclusion (usually around $18,000 to $19,000 per person). Anything you give above that counts against your lifetime gift and estate tax exemption. If you’ve already won a massive jackpot and go over your lifetime limit, you—the giver—might have to pay a gift tax of up to 40% on the money you’re giving away.
To avoid this, many winners set up a Family Share Agreement before they turn in the ticket. If you can prove the ticket was a joint venture, the tax burden is split among the group, and you aren't "gifting" the money; everyone is just receiving their own share. But you have to do this legally and carefully before the state processes the claim.
Real Examples of the "Tax Haircut"
Let's look at the famous 2022 Powerball win in California—the $2.04 billion jackpot.
The winner, Edwin Castro, took the lump sum of $997.6 million.
California doesn’t tax lottery winnings. Lucky him.
However, the federal government took 37%.
That’s roughly $369 million gone instantly to the IRS. He walked away with about $628 million. He’s doing fine, obviously—he bought a $25 million mansion in Hollywood Hills—but he still "lost" nearly $1.4 billion from the headline number due to the cash-value reduction and taxes.
Actionable Steps for the "What If" Scenario
If you find yourself holding a winning ticket, do not sign the back of it until you’ve checked your state’s rules. In some states, signing it makes it a legal document that can't be changed. In others, you might want to claim it under an anonymous LLC or trust to keep your name out of the papers.
- Secure the ticket. Put it in a safe deposit box. Seriously.
- Go Dark. Delete your social media. Change your phone number. Once your name is public, every "long-lost cousin" and "charity" will be at your door.
- Hire a "Wealth Team." You need three people immediately: A tax attorney, a certified public accountant (CPA) who deals with high-net-worth individuals, and a fee-only financial planner.
- Calculate the 37%. Whatever you think you owe, assume the IRS wants more. Open a high-yield account specifically for the tax bill so you aren't surprised in April.
- Check your state residency. If you’re in the middle of moving from a high-tax state to a low-tax state, talk to an attorney about where you "reside" legally before you cash that check.
The tax on winning the lottery is massive, but it's manageable if you treat the windfall like a business rather than a shopping spree. You've beaten the one-in-292-million odds of winning; don't let the 100% certainty of taxes ruin the prize.