Lottery winnings! A miracle that can make your dreams come true in a split second. But wait. Before you dive into a pool of gold coins like Scrooge McDuck, there’s something you need to consider: taxes. Yes, the taxman will be coming for some of your winnings. Don’t panic, let’s break down how your lottery winnings are taxed and what you should do if you get lucky enough to win the lottery.

State Tax Bill

The taxation of lottery winnings is different from place to place. The rate varies in different states with the median being between 2.9% and 8.82%. Some states don’t even charge state tax on income. Those states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Wyoming, and Washington. So, make sure to verify your state’s tax regulations before popping the champagne bottle.

State Tax Bill

Federal Bill

Next, let’s look at the federal level. The IRS categorizes lottery winnings as income. The IRS will withhold 24% of your winnings on any prize over $5000. The rest will be owed when you file your taxes, but if you win a large sum of money expect to pay the top federal tax rate of 37%. How much you owe ultimately depends on your winnings, other sources of income, and how you choose for your winnings to be paid out to you.

Choosing How You Want Your Lottery Winnings to Be Paid Out

There are two different options: lump sum or annuity.

Choosing to receive the lump sum means all the winnings are given to you immediately. Although you would have a big bag of cash, it will be accompanied by a weighty tax bill. Get ready for a significant discount.

Selecting the annuity option ensures that you’ll get your winnings in installments over a long period. It resembles a golden goose that lays eggs every single year. Every year, you will be taxed on each installment instead of the entire sum.

So, which is the best avenue to go down? It depends on your situation. If you want all the money immediately to make a large investment like buying a house, then the lump sum may be the best option for you. If you want to ensure that you don’t spend all your money, then an annuity might make sense for you. In any case, consulting with a financial advisor would be the best course of action so you are making the best financial decision for your future.

Choosing How You Want Your Lottery Winnings To Be Paid Out

Using Deductions to Lighten the Tax Load On Lottery Winnings

Whether you have chosen the lump sum or the annuity, you can still use deductions to lighten your tax load. Consider charitable donations, mortgage interest, and so on. Even a small reduction can go a long way.


Lottery winnings that are taxed are not completely bad. With good planning and smart financial handling, you will be able to handle lottery winnings like a pro. Go for it; dream big, purchase that ticket, and see where that leads you. You could be the newest lucky winner! When it comes to taxes, however, “ignorance isn’t bliss.”  Educate yourself, plan, and keep that taxman from taking too much of your prize.

If you need financial advice or a financial review, we would be happy to introduce you to a licensed advisor at our sister company, Asset Strategy Advisors (ASA).  ASA is an SEC registered investment advisor.  Contact us, or click HERE, to learn more.



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