I’m a CPA: Here’s What Happens to Your Taxes When You Win the Lottery
Congratulations — that lottery ticket you purchased on a whim has paid off, literally. You’re likely daydreaming about plans for your windfall. Maybe that vacation to Bali you have been dreaming about for years is suddenly within reach.
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Before you answer that call, remember: Winning the lottery comes with major tax implications.
To plan effectively, you should understand what happens to your taxes once you claim your prize. MoneyLion spoke with Kyle Paxton, CPA, tax director at James Moore & Co., to learn what could happen to your tax bill once you become a lottery winner.
1. You’ll Likely Need Help Navigating Taxes
Before you indulge in too many fantasies about your jaunt around the world, Paxton wants you to know that lottery prizes are considered taxable income at the federal level. Simply put: You must report the full amount of your winnings on your tax return for the year you receive them.
That’s not all. Other complexities may come into play.
“If your prize exceeds certain thresholds, the lottery agency may withhold a portion upfront," he said. "However, withholding is not the same as final tax liability. You may owe more — or potentially receive a refund — depending on your total income and deductions for the year.”
For example, federal law generally requires a 24% withholding on certain gambling winnings, including large lottery prizes. However, that withholding may not fully cover the taxes owed if your winnings push you into a higher tax bracket.
Does that sound complicated to manage on your own? For many people, it is. To stay on top of it all, you’ll likely need to work with a trusted tax professional or CPA.
2. You Could Move Into a Higher Tax Bracket
With large enough winnings, you could be pushed into a higher federal income tax bracket. Because the U.S. uses a progressive tax system, portions of your income are taxed at increasing marginal rates as your income rises.
In a nutshell, that means part of your income may be taxed at higher rates, significantly increasing your overall tax bill. You may also find that certain credits or deductions phase out based on income limits.
“Even if you choose to receive winnings in annual installments (annuity payments), each payment is still taxable in the year received,” Paxton said.
3. You Could Also Be on the Hook for State Taxes
Though you might think only the federal government is interested in taxing your lottery winnings, that may not be the case — depending on where you live. Some states impose state income taxes on lottery prizes, while others do not.
“If you live in one state but purchased the ticket in another, state tax rules can become more complex,” Paxton said. “It’s important to understand both federal and state obligations before making financial decisions.”
For example, some states tax lottery winnings where the ticket was purchased, while others tax them based on residency. That means you could potentially face multiple state tax considerations.
To untangle these potentially knotty financial and tax issues, it's wise to consult a CPA or other qualified tax professional.
4. Tax Implications Differ Based on How You Take Your Winnings
Paxton explains that lottery winners generally can choose between taking a lump-sum payout — typically a reduced immediate amount — or selecting an annuity that spreads payments over many years. Each option carries different tax implications.
“The lump sum may increase your income significantly in one year, while annuity payments spread tax liability across multiple years,” he said. “The right choice depends on your broader financial goals, cash flow needs and long-term planning strategy.”
In other words, the way you receive your winnings can shape how — and when — you pay taxes on them.
5. Large Wins Affect More Than Just Income Tax
Like almost everyone, you may daydream about winning the lottery. If that dream comes true in a big way, there are additional tax and financial considerations to keep in mind.
Paxton points to several of these considerations:
Estimated tax payments
Investment income planning
Estate and gift tax strategy
Asset protection considerations
Charitable planning opportunities
He’s also clear about what to do next.
“A sudden wealth event requires careful coordination with financial, legal and tax advisors,” he said.
The Bottom Line
Winning the lottery can be a life-changing event — but it can also dramatically affect your taxes.
Whether you find yourself in a new tax bracket, navigating state and federal taxes, or facing unexpected tax consequences, one thing is clear: Working with a trusted tax advisor can help you understand your obligations and make smarter decisions with your winnings.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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