Tallying Up the Taxes of Lottery Winnings (2024)

Choosing the lump sum payout vs the annuity option

If you choose to take the lump sum payout, a $1.5 billion jackpot is really worth about $930 million. That’s because $930 million is the actual jackpot and the $1.5 billion is the calculated worth if you choose the annuity payment plan.

The annuity option are annual payments typically stretched out over 29 years. When you choose this, you end up with more money over the long haul because the base amount—$930 million—accrues interest earned over an additional 29 years after the year in which you win. The money you haven't taken yet is invested for you.

You must pay federal income tax if you win

You'll fall into the highest tax bracket in the year you win if you take the jackpot in a lump sum. For 2023 and 2024, this means you'll likely owe the IRS at least 37% in taxes. If the bounty is spread out over 30 years, you may not be in the highest tax bracket each year, depending on the size of your prize and your other income.

All winnings over $5,000 are subject to tax withholding by lottery agencies at the rate of 24%. This potentially leaves a gap between the mandatory amount of withholding and the total tax you'll ultimately owe, depending on your tax bracket.

It works out something like this if you take the lump sum for the $930 million jackpot:

• $930 million, less 24% withheld = $232,200,000
• Less an additional $111,900,000 (to meet 37% tax rate)
• Total prize after federal income tax = $585,900,000

TurboTax Tip:

TurboTax Tip: If you join a lottery ticket-buying pool and win, you’ll be responsible for paying taxes on your portion of the winnings. If you personally claim the prize on behalf of the pool, be sure to have a written contract defining everyone’s shares so you’re not responsible for the income tax withholding for all the winnings and are not required to pay any gift tax on the amount you share with other members of the pool.

Gift and estate taxes

As of 2023, the Internal Revenue Code allows you to give away—by gift and from your estate when you die—a total of $12.92 million over the course of your lifetime. You'll typically owe40% ingift tax for any 2023 cash or property transfers you make over $12.92 million, as well as a 40% estate tax on the value of your remaining estate. For 2024, the limit increases to $13.61 million.

Be careful with pool winnings

If you join a pool with others to buy a stockpile of tickets, your prize will be smaller because you're sharing it. But you're still subject to the income tax rate for the bracket your portion of the winnings places you into. If you personally claim the prize on behalf of everyone in your pool, protect yourself by documenting that the entire windfall isn’t yours.

If you collect the total winnings, then allot everyone else their share, the IRS may assume that you're giving the money away, which can result in the gift tax. You might also be responsible for income tax withholding on the entire winnings. Have everyone enter into the pool with a written contract defining his or her shares, which you can then provide to the IRS if necessary.