What Are the Taxes on Powerball Winnings?
A large lottery prize is a significant taxable event. Understand how federal rules, state laws, and payment choices shape your final tax liability.
Winning the Powerball jackpot is a significant taxable event under federal and state laws. Understanding the tax implications is a primary step in managing a large lottery prize. The amount of tax owed and the timing of those payments are determined by a series of choices and regulations that begin the moment a prize is claimed.
Immediate Tax Withholding on Winnings
Upon claiming a lottery prize, the winner does not receive the full advertised amount. The Internal Revenue Service (IRS) mandates that the lottery agency automatically withholds a portion of the winnings for federal taxes. For any gambling winnings over $5,000, there is a mandatory flat withholding of 24%. This withholding applies to cash and noncash prizes, with the value of a noncash prize being its fair market value.
This 24% withholding is only an initial payment toward the total federal income tax liability. The lottery agency reports the gross winnings and the amount of federal tax withheld to the winner and the IRS using Form W-2G. Some states also require the lottery agency to withhold taxes when the prize is claimed. This state-level withholding is separate from the federal requirement and varies depending on the state where the ticket was purchased.
Calculating Your Final Federal Income Tax
The amount withheld is just a down payment on the final federal tax bill. Lottery winnings are considered ordinary income by the IRS and are taxed at the same rates as wages. A substantial jackpot will push a winner’s income into the highest federal income tax bracket. For the 2025 tax year, the top marginal tax rate is 37% for single filers with income over $626,350.
This creates a gap between the 24% that was initially withheld and the 37% top tax rate. For example, on a $10 million lump-sum prize, $2.4 million would be withheld, but the final federal tax could be closer to $3.7 million, leaving an additional $1.3 million to be paid on Form 1040. To avoid a large tax bill and potential underpayment penalties, winners are often required to make quarterly estimated tax payments to the IRS. These payments cover the anticipated shortfall between the initial withholding and the final tax liability.
State and Local Tax Obligations
Beyond federal taxes, most states and some local governments also tax lottery winnings. State tax laws vary widely, with some states having no income tax at all. Other states tax lottery winnings as ordinary income, with some of the highest rates reaching over 10%. Two factors determine a winner’s state tax liability: the state where the ticket was purchased and the winner’s state of residence.
The state where the ticket was purchased has the first right to tax the winnings, even if the winner is not a resident. If a winner’s home state also has an income tax, they will need to file a tax return there as well. To prevent double taxation, the winner’s home state will provide a tax credit for the taxes paid to the state where the ticket was purchased. Local taxes, imposed by cities or counties, can add another layer of taxation.
Lump Sum Versus Annuity Tax Treatment
Powerball winners must choose between receiving their prize as a single lump sum or as an annuity paid over 30 years. Opting for the lump sum means the entire cash value of the jackpot is received and taxed in a single year. This subjects the winner to the highest possible tax bill in that year, as the full amount is recognized as income at once.
The annuity option, in contrast, spreads the tax liability over three decades. The winner receives an initial payment followed by 29 annual payments that increase by 5% each year. Taxes are paid each year only on the amount of that year’s payment. This structure can prevent the winner from being in the highest federal tax bracket every single year, depending on the size of the annual payment.
For example, a $1 billion jackpot might have a lump sum cash value of around $525 million, which would be taxed in one year. The annuity, however, might provide annual payments that spread the income and the tax payments over a much longer period.
Additional Tax Considerations
Sharing winnings with family and friends can trigger federal gift tax. For 2025, an individual can give up to $19,000 to any number of people without any tax consequences. Gifts exceeding this annual exclusion amount must be reported to the IRS on Form 709 and will count against the giver’s lifetime gift and estate tax exemption. The lifetime exemption for 2025 is $13.99 million per individual. If the total of lifetime gifts exceeds this exemption, a gift tax of up to 40% may be owed.
One way to avoid this is to form a legal partnership to share the prize before it is claimed, allowing each person to be taxed on their individual share. The winnings also become part of the winner’s taxable estate upon their death. If the total value of the estate exceeds the federal estate tax exemption threshold, the excess amount could be subject to estate tax, also levied at a rate of up to 40%.