Winning the lottery can be a life changing moment. You can go from making a modest income to becoming a millionaire overnight. The Powerball jackpot alone is currently more than $150 million.
You hit the jackpot. But with this new fortune comes new responsibilities. The IRS considers lottery winnings taxable income. Your winnings could push you into the highest tax bracket, and you’d end up paying Uncle Sam a sizable portion.
Uncle Sam Wins Too
Before you see a penny of your jackpot, lottery agencies are required to withhold 24 percent of your winnings over $5,000 to cover federal taxes. Some states also take a portion for tax withholding, and the rate could be more than 15 percent. So if you win $1 million and you choose to get it in a lump sum, you’ll actually be getting $760,000 (assuming you live in a state that doesn’t tax lottery winnings).For federal purposes, your lottery winnings are taxed as ordinary income. This means that if the amount is large enough, your lottery winnings can be combined with your current income to push you into the highest federal tax bracket of 37 percent.
So if you win $1 million, you’d automatically get bumped to the 37 percent tax bracket. That’s because that bracket begins at $609,351 for single filers and $731,201 for those married filing jointly.
Luckily, you won’t pay a 37 percent tax rate on the entire $760,000. That’s because our tax system is progressive. So you’d pay different rates on different portions of your income. The highest rate of 37 percent would be applied to your income amount above $609,351.
But remember, your lottery winnings are part of your earned income for the year. So you may owe a heftier tax bill if you’re already in the 37 percent tax bracket to begin with.
Also, keep in mind that the states of Maryland and Arizona also charge taxes to nonresidents. So if your winning ticket was purchased in one of these states, you’d owe state taxes on your winnings even if you don’t live in that state.
- Alaska
- California
- Delaware
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Should You Take a Lump Sum or Annuity Payments?
Whether you should take your winnings in a lump sum or break them up into monthly payments depends on factors such as your financial situation and the size of the prize. A substantial amount taken in a lump sum could have significant tax consequences. And you may fall victim to splurging it all at once.What to Know About Tax Season 2025
Tax season for 2025 is underway. This means millions of Americans are filing their 2024 taxes. Many are also eligible to file their federal taxes for free even if they have lottery winnings to report.If your adjusted gross income (AGI) for 2024 was $84,000 or less, you can file your federal taxes online for free through IRS Direct File, although you’ll need to take the standard deduction to qualify for Direct File. Most people take the standard deduction anyway, rather than itemizing deductions.
How to File in Person
You can use Direct File or various online software tools to file your taxes this year. But you can also look into free in-person programs such as the following.- IRS Volunteer Income Tax Assistance (VITA)
- AARP Foundation Tax-Aide
- Tax Counseling for the Elderly (TCE)
- You have a disability
- You’re 60 years or older
- You speak limited English or speak it as a second language
The Bottom Line
If you win more than $5,000 through the lottery or legal gambling, you’ll end up paying some sort of tax on it. That’s because your winnings will be part of your total taxable income for the year. As a result, it can push you into another tax bracket, or even the highest tax bracket at 37 percent. The good news is, you could minimize the tax hit by taking your winnings in the form of annual payments instead of a lump sum.Depending on the size of your winnings, however, you may still qualify to file your federal taxes for free via Direct File or receive free in-person assistance through programs staffed by IRS-approved tax preparers.
