What Is the Illinois Lottery Tax on Winnings?

In Illinois, lottery winnings are treated as taxable income by both the federal government and the state, meaning a portion of any prize is owed to tax authorities. Understanding these tax obligations is a part of managing such a windfall. These obligations involve immediate tax withholding when the prize is claimed and subsequent reporting on annual tax returns.

Immediate Tax Withholding on Winnings

Upon claiming a lottery prize in Illinois, winners do not receive the full amount due to automatic tax withholding. For any prize greater than $5,000, the Internal Revenue Service (IRS) requires a flat 24% federal withholding. This amount is sent directly to the federal government on the winner’s behalf.

Illinois also imposes its own state-level tax with a flat income tax rate of 4.95%. For prizes of $1,000 or more, the Illinois Lottery will withhold this 4.95% for state income taxes. These withheld amounts are prepayments of the winner’s estimated tax liability.

The total tax owed may be higher than the amount initially withheld, depending on the winner’s total annual income and tax bracket. For non-resident winners, Illinois withholding rules still apply. Their home state’s tax laws determine if they owe additional taxes, though some states have agreements that prevent double taxation.

Required Tax Forms for Lottery Winnings

When a person wins a large amount from the Illinois Lottery, they will receive IRS Form W-2G, “Certain Gambling Winnings.” The Illinois Lottery issues this form to the winner and files a copy with the IRS. Winners should receive their copy by the end of January in the year following their win.

This form provides the necessary information for tax filing. Box 1 shows the total gross amount of the winnings before taxes. Box 4 details the amount of federal income tax that was withheld, which is 24% for prizes over $5,000.

Box 15 of the W-2G is for reporting state income tax withheld. For an Illinois prize, this box will show the 4.95% that was withheld by the state lottery commission. This form is the official record of the gambling income and tax prepayments.

Reporting Winnings on Annual Tax Returns

Information from Form W-2G must be reported on both federal and state returns. The gross winnings listed in Box 1 are included in the filer’s total income for the year. On a federal return, this income is reported on Schedule 1 of Form 1040, under “Additional Income.”

The amounts withheld for taxes are then claimed as payments. The federal income tax withheld is entered on the main Form 1040 in the section for all federal income tax withheld. This provides the winner credit for the amount already sent to the IRS.

On the Illinois state tax return, Form IL-1040, lottery winnings are included in the Illinois base income. The state tax withheld is claimed as a payment on the IL-1040, reducing the total state tax owed. If the amount withheld is more than the total tax liability, the winner will receive a refund.

Tax Implications of Payout Options

Winners of large jackpots choose between a one-time lump-sum payment or an annuity paid over several decades. This decision has tax consequences driven by the timing of the income and how it interacts with progressive federal income tax brackets.

A lump-sum payment means the entire cash value of the prize is received in a single tax year. This large amount of income will likely push the winner into the highest federal income tax bracket, which has a top marginal rate of 37%. Consequently, a substantial portion of the winnings will be taxed at this highest rate.

The annuity option spreads payments over a long period, often 30 years, resulting in a smaller amount of reported income each year. While each payment is taxable, it may not be large enough to place the winner in the highest tax bracket annually. This can lead to a lower overall effective tax rate over the life of the annuity.