Saving & Spending Taxes

How to Avoid Taxes on Lottery Winnings

Deductions and the right payout can help offset what you owe, but what you really need is a pro to advise you.

By Christy Rakoczy
and Mary Beth Eastman

Edited by Melinda Sineriz, ABFP™

Updated Dec. 17, 2024

Buying lottery tickets isn't a wise money move. The odds are against you big-time, with your chances of winning at about one in 300 million. But it's fun, and someone has to win, right?

If you decide to gamble on those odds and wind up winning, don’t forget your obligations to the government. You will owe federal income taxes on lottery winnings, and depending on where you live, your state may want a cut of that money as well. Skipping out on your taxes will cost you even more in penalties, interest, and fees, so you might as well minimize what you owe and pay it. Here’s how you can avoid taxes if you hit it big.

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How lottery winnings are paid: Lump-sum vs. annuity

Before we get into how winnings are taxed, you need to know your options for getting paid. Lottery winners typically have two choices for collecting their prizes:

A lump-sum payment, which is received all at once
An annuity payment, which is paid out in annual installments

A lump-sum payment is usually around 40% to 50% of the actual jackpot value, which is typically calculated for annuity payments. For example, if the Powerball jackpot were $228.4 million, the winner might get a lump-sum payment of around $114 million. If they opted for the annuity, they might receive the full $228.4 million spread out into payments over 30 years.

Which is better?

Whether you should take a lump sum or an annuity depends on many factors.

Take the lump sum if:

You think tax rates will rise. Tax rates can change due to tax laws, or you might anticipate being in a higher tax bracket down the road. If so, you may want to accept a lump-sum payment now to have the entire amount taxed at one rate and get taxes over with.
You know you’ll be responsible with the money. If you know you can resist the temptation of major shopping sprees or splurges and have a plan for the cash, you might decide to take it all upfront to start investing it or taking advantage of compound interest.
You have a major purchase or need. If you have a huge expense — like a mortgage and a new house or a pile of medical bills — a lump-sum payout could give you immediate relief.

Take the annuity if:

You want steady earnings. Take the annuity if you want to keep money coming in for yourself or your children, and you would feel secure with more payments on the horizon.
You want more money. You’ll get a higher total payout by choosing the annuity option.
You want to save on annual taxes. Choosing the annuity means you can keep your income low enough that you might not be in the highest tax bracket each year, which can be all but guaranteed for lump-sum payments.

How lottery winnings are taxed

Lottery winnings are taxed as ordinary income, so the amount you pay depends on your tax bracket. Depending on your bracket, tax rates range from 10% to 37%.

Good to know

Contrary to popular belief, you don't pay taxes at the highest rate you fall into on every dollar you earn — just on income that falls within the threshold for that tax bracket.

When you win the lottery and choose a lump-sum payment, you pay all the taxes at once in the year the payment is received. This would mean a huge chunk of the money is taxed at the highest rate because your “income” will temporarily skyrocket. But you’ll know exactly what rate you’ll be taxed at (conversely, taking the annuities would mean not knowing for certain how much you’ll pay on your winnings each year because tax rates can increase or decrease).

Federal taxes

The Internal Revenue Service (IRS) considers lottery winnings a form of gambling winnings. You might receive a Form W-2G to report your earnings, and you must report the money you receive from a lottery payout as “Other Income” on Form 1040 when you file your income tax return.

Federal tax example

To understand how this works, let's look at an example:

Say you usually earn $50,000 in taxable income as a single tax filer. Each income bracket is taxed differently, and only a fraction is taxed at a higher rate. Here’s a simplified look at how your taxes would be calculated based on the 2025 tax brackets released by the IRS.

Federal tax bracket	Amount of income in this bracket	Tax rate	Total tax
$0 to $11,925	$11,925	10%	$1,192.50
$11,925 to $48,475	$36,550	12%	$4,386
$48,475 to $103,350	$1,525	22%	$335.50

Your total tax would be $6,364.

Now suppose you received $100,000 in lottery winnings, bumping up your total taxable income to now $150,000. You’d owe tax on your income in brackets, just as you did before, only now there’s more income in the higher brackets:

Federal tax bracket	Amount of income in this bracket	Tax rate	Total tax for this bracket of income
$0 to $11,925	$11,925	10%	$1,192.50
$11,925 to $48,475	$36,550	12%	$4,386
$48,475 to $103,350	$54,875	22%	$12,072.50
$103,350 to $197,300	$46,650	24%	$11,196

Your total tax on income, including lottery winnings, would be $28,847.

If your lottery winnings exceed $5,000, they can be subject to a 24% federal withholding tax. This means taxes are taken directly from your winnings, and you may need to claim a refund if too much is withheld (or pay more if too little).

Good to know

Another thing to keep in mind is that your tax winnings could push your taxable income over the threshold for some tax credits or deductions, such as the Earned Income Tax Credit. That means your lottery winnings could cause you to lose out on these tax savings opportunities for the year.

State and local taxes

Although federal tax rules apply across the U.S., state and local taxes are much more complicated. That's because each state and local government sets rules for taxing lottery winnings.

Your lottery winnings won't be taxed in states with no income tax — including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. And some states, such as California, don’t tax lottery winnings. But you'll be taxed at your ordinary state income tax rate for all other state lotteries.

Most states that impose taxes on your winnings require some money for those taxes to be withheld upfront before you receive your winnings. For example, in Arizona, 24% of your winnings will be withheld for federal income tax purposes and 4.8% for state taxes.

Check your state and local Department of Revenue website for its rules on lottery taxes.

How to avoid taxes on lottery winnings

Once you’ve won the jackpot, you can minimize your taxes and reduce your tax bill with these tips.

Donate to charity

Charitable contributions can reduce your tax bill because you can deduct them from your taxable income. However, there is a limit on the value of your charitable deduction relative to your adjusted gross income.

Typically, your deduction is capped at 60% of your adjusted gross income for charitable contributions. However, the limit can sometimes be lower if you're making contributions of property subject to long-term capital gains taxes. If you reach the limit of how much you can deduct for your contribution, you may be able to carry it forward and claim some of the deduction in a later tax year.

You also must itemize your taxes to claim charitable donations as a deduction, which brings us to our next point.

Itemize deductions

Because lottery winnings are part of your income, you may be able to reduce your tax liability by taking other deductions. You could claim the standard deduction, which is a set amount based on your filing status. It's $30,000 for married joint filers and $15,000 for single tax filers in the 2025 tax year.

But before you take the standard deduction, calculate whether you’d save more if you itemize your deductions. Itemizing means claiming tax deductions for specific things, which might include:

Mortgage interest
State and local taxes paid (up to $10,000)
Medical bills
Qualifying educational expenses
Contributions to certain retirement plans

You can use tax software or a tax advisor to identify all the potential deductions you could claim.

Claim your gambling losses

If you itemize your deductions, you may be able to deduct gambling losses to offset the gambling income you report on your tax return. You will need to have a record of your losses.

Your gambling losses can only be deducted against your winnings. If your losses exceed your winnings, you can’t apply those losses to the rest of your taxes. This one will only work if you gamble pretty regularly — for instance, maybe you had to buy a lot of lottery tickets before you got a winner, or you try your luck at casinos before or after your jackpot.

Hire a tax professional

Even if you can do some of the work yourself, I think the safest and smartest way to minimize taxes after a lottery win is to call in the pros.

A tax professional such as a certified public accountant (CPA) can help you understand the consequences of different decisions, such as choosing a lump sum versus an annuity payout or itemizing versus claiming the standard deduction. Ask them for tips to save on your lottery taxes based on your financial situation, and they can help uncover tax strategies you didn’t even know to ask about.

Pro tip

While you’re at it, call up a financial advisor to help you figure out how to manage your money now that you have much more of it.

FAQs

What is the best way to share your winnings with family and friends?

The best way to share winnings with family and friends is by giving them gifts. You can give tax-free gifts of up to $18,000 in 2024 and $19,000 total in 2025. Some gifts, such as paying tuition or medical expenses, aren't taxable even if they exceed the annual exclusion.

How do you protect your money if you win the lottery?

Talk with attorneys and tax professionals. They can advise you on protecting your winnings based on your unique finances. Their advice might include putting some money into a trust or allocating it for various investments.

You should also be careful about who you tell about your winnings. And if you expect that you may face pressure to spend it quickly or don't know how to invest it, you may be better off choosing to have the money paid out over time in an annuity rather than getting the payment as a lump sum.

Bottom line

Holding that winning lottery ticket is exciting, but you need to protect yourself and your newfound riches. Call a CPA or a fiduciary financial advisor to help you figure out your best move.

By getting the right professional advice and making informed decisions about how you receive and spend your prize, you can make the windfall last as long as possible. It can also help you avoid lottery mistakes and preserve your wealth for future generations.

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