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Hit the jackpot? The tax rules have changed.
A new law reshaping the American tax code will affect how lottery winners handle their windfall. The legislation extends key provisions from the Tax Cuts and Jobs Act and introduces changes that every big winner needs to understand before claiming their prize.
The new tax landscape
The One Big Beautiful Bill makes the Tax Cuts and Jobs Act provisions permanent. This matters for lottery winners because it locks in the current tax bracket structure, including the 37% top rate that catches most major jackpot winners.
The bill also increases the cap on state and local tax deductions, cuts energy credits, reforms taxes on tips and overtime, and adjusts Medicaid and student loan programs. But for lottery winners, the most significant impact comes from how these changes interact with massive one-time income events.
What happens when you win
The rules are straightforward. Win big, and you pay big.
Lottery agencies withhold 24% from any prize over $5,000. But here's the problem: if your winnings push you into the 37% bracket, you'll owe the difference when you file your return.
Consider a $1 billion advertised jackpot. The lump sum is approximately $620 million. After the mandatory 24% withholding, you're down to $471.2 million. Then you owe another 13% to reach the 37% rate. That's an additional $80.6 million. Your final take: $390.6 million.
Lump sum or annuity?
This choice determines your tax burden for decades.
The lump sum puts you in the highest bracket immediately. You pay 37% federal tax in year one.
The annuity spreads payments over 29 years. You receive the $620 million base plus interest earned over three decades. Each payment faces taxation, but you might avoid the top bracket in some years depending on your other income.
Why does the annuity pay more? The money you haven't received yet gets invested. That interest compounds for years, turning $620 million into $1 billion over the full payment period.
The choice between annuity and lump sum payments is probably one of the hardest decisions big jackpot winners must make.
The gift tax trap
Want to share your wealth? Proceed carefully.
You can give away $13.99 million over your lifetime without triggering gift tax. Anything beyond that? You owe 40% to the IRS. Your estate faces the same 40% rate on amounts exceeding this threshold when you die.
Pool winners face extra scrutiny. If you claim the prize for a group, document each person's share immediately. Without written proof, the IRS assumes you're gifting money to the other winners. That triggers gift tax and makes you responsible for withholding on the entire amount.
Create a written contract before buying tickets. Define each member's share. Present this to the IRS if questioned.
State taxes add another layer
Federal taxes aren't the only hit. Most states also tax lottery winnings, although rates vary widely. Some states charge nothing. Others take 10% or more. These state taxes stack on top of your federal obligation.
The increased SALT (state and local tax) deduction cap helps here. You can now deduct more state and local taxes on your federal return. But even with the higher cap, you'll likely exceed the limit with a massive jackpot.
Planning before you claim
Assemble your team before claiming: a tax attorney, a CPA experienced with high-net-worth clients, and a financial advisor. They'll model both payment options against your specific situation.
Review your state's rules. Some require public disclosure of winners. Others allow anonymity through trusts. Your legal team should establish the right structure before you sign the ticket.
The new legislation locks in the current structure, removing uncertainty about future rate changes. Winners in 2026 and beyond will face the same high rates as those in 2025. Understanding the tax reality helps you plan for the day your numbers finally hit.
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