How Are Wisconsin Lottery Winnings Taxed?

Lottery winnings are considered taxable income by both the federal government and the state of Wisconsin. The amount of tax withheld immediately is different from your final tax obligation, and your choices about how to receive the money have long-term financial consequences.

Immediate Tax Withholding on Winnings

Upon claiming a lottery prize, winners do not receive the full advertised amount because the Wisconsin Lottery is required by law to withhold taxes from large payments. For any prize greater than $5,000, the Internal Revenue Service (IRS) mandates a flat 24% federal withholding.

In addition to federal withholding, Wisconsin requires its own tax deduction on any lottery prize of $2,000 or more. This withholding is calculated at the state’s highest individual income tax rate of 7.65%.

Shortly after the year you claim your prize, the Wisconsin Lottery will send you a Form W-2G, “Certain Gambling Winnings.” This tax document details the total amount you won and the exact amounts of federal and Wisconsin taxes that were withheld. These withheld amounts are an initial payment and likely will not cover your entire tax bill for the year.

Calculating Your Final Tax Bill

The initial combined withholding is an estimate, and the final tax bill is almost always higher. Lottery winnings are taxed as ordinary income, not at a special lottery rate. This means the prize money is added to your other annual income, such as wages, which can push you into the highest tax brackets.

For federal purposes, your winnings are subject to a progressive tax system where different portions of income are taxed at different rates. A large jackpot will place a winner into the top federal tax bracket of 37%.

Wisconsin also taxes the winnings as regular income, and a significant prize will push a winner into Wisconsin’s highest tax bracket of 7.65%. The combined top federal and state rates are substantially higher than the amount initially withheld, creating a tax gap that the winner is responsible for paying.

Lump Sum vs. Annuity Payout Tax Implications

Lottery winners must choose between receiving their prize as a single lump sum or as an annuity paid out over many years, a decision with tax consequences. Opting for the lump sum means receiving the entire cash value of the jackpot at once. This provides immediate access to the full amount, but it also means the entire prize is taxed in a single year, subjecting the majority of it to the highest federal and state tax rates.

Choosing the annuity option means the prize is paid in annual installments, often over 30 years. Each payment is taxed as ordinary income in the year it is received. This structure spreads the total tax liability over several decades.

While each annual payment will likely still be large enough to fall into the top tax brackets, it can make the annual tax bill more predictable and manageable. The annuity provides a steady income stream but less immediate control over the full prize.

Reporting Lottery Income on Your Tax Returns

When it is time to file taxes, the information from Form W-2G is used to report the winnings accurately. On the federal tax return, Form 1040, gambling income is reported on Schedule 1 as “Other Income.” The federal income tax withheld, as shown on the W-2G, is reported in the payments section of the main Form 1040.

For state filing, the winnings must be reported on the Wisconsin income tax return, Form 1. The lottery income is included in the calculation of Wisconsin gross income, and the state tax withheld from the W-2G is claimed as a credit.

Because the initial withholding is often insufficient to cover the total tax due, winners may need to make estimated tax payments. These are made using Form 1040-ES for federal taxes and Form 1-ES for Wisconsin taxes to cover the tax liability not handled by withholding.