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What is the federal tax rate on lottery winnings in 2025?
Executive Summary
The federal treatment of lottery winnings in 2025 involves an automatic 24% federal withholding on prizes over $5,000, but that withholding is not necessarily the final tax bill; winners’ actual federal tax liability is determined by their total taxable income and can reach the top ordinary-income rate (37%) if the winnings push them into that bracket [1] [2] [3]. Winners who receive lump sums can face a large one‑year income spike and higher marginal rates, while annuities spread income over years and can change the effective tax outcome; state and local taxes remain additional and vary widely [4] [5] [6].
1. What proponents and calculators all claim about the 24% automatic withholding — a simple floor, not the whole story
Multiple explanatory pieces and tax calculators state the IRS requires lottery agencies to withhold 24% of federal tax on taxable prizes above $5,000, and many public-facing guides present that withholding as the immediate tax outcome winners will see on the payout check [1] [5] [4]. These sources emphasize that the 24% is a mandatory upfront withholding, not an absolute tax rate: it reduces what winners receive at the time of payout but is reconciled on the winner’s annual tax return. The withholding rate is designed for information reporting and initial tax collection; it may underwithhold or overwithhold relative to the winner’s final tax liability, depending on their other income and deductions. Tax tools and outlets repeat this baseline withholding rule while cautioning that the withholding may be insufficient for high-income winners facing top marginal rates [2] [5].
2. The final federal tax bill: ordinary income rules and the 37% top rate
Authoritative tax analyses and major financial outlets consistently treat lottery winnings as ordinary taxable income subject to the regular federal income‑tax brackets, meaning winners add the prize to their other income to compute taxable income and tax owed [7] [3]. For 2025, the highest marginal ordinary‑income rate stands at 37%, and winners whose combined taxable income after deductions exceeds the top-bracket thresholds will owe tax at that marginal rate on income in that bracket; consequently, the effective tax rate on a big lump‑sum prize can substantially exceed the 24% withheld [2] [6]. Several analyses illustrate this reconciliation: the lottery operator withholds 24% at payout, but the IRS may require additional tax when the winner files if the prize pushes them into higher brackets [4] [3].
3. Lump sum versus annuity: timing matters for taxable income and withholding
Tax guidance notes a crucial difference between choosing a single lump‑sum payment and selecting an annuity: lump sums create an immediate, large taxable event potentially subjecting a single year to the top marginal rate, whereas annuities spread income and tax across many years, often smoothing marginal rates and withholding outcomes [4] [3]. Sources point out that annuity payments still count as ordinary income in each year they’re received, and the 24% withholding rule applies to payments over the threshold, but the timing of recognition can change whether additional taxes are owed in any given year. Tax planning opportunities—such as adjusting withholdings, estimated tax payments, or charitable deductions—differ sharply depending on payout choice, so the choice of payment form is a central determinant of the final federal tax burden [1] [5].
4. State and local taxes can add materially to the bill and vary by jurisdiction
Every major guide stresses that state and local taxes are separate from federal withholding and vary markedly by state, with some jurisdictions imposing no tax on winnings and others levying substantial rates or flat withholdings; winners must account for these additional layers when estimating total tax liability [1] [5]. Several calculators and state‑focused writeups provide examples showing winners in high‑tax states can owe significant additional percentages beyond the federal 24% withholding, while winners in tax‑free states face only federal tax, potentially altering payout strategies. The presence of local income tax, residency rules, and whether the lottery is claimed by a trust or individual can also change state tax exposure; state rules often determine net take‑home pay almost as much as federal law [8] [5].
5. Bottom line for winners in 2025: expect 24% withheld, plan for up to 37% federal tax plus state levies
The clearest, consistent facts across sources are: expect a 24% federal withholding on prizes above $5,000 at payout, but treat that as a minimum interim step; compute final federal liability using ordinary‑income tax brackets where the top marginal rate can reach 37%, and add state/local taxes as applicable [1] [2] [3]. Practical tax advice in the sources calls for winners to consult tax professionals immediately to manage withholding, estimated payments, and payout elections—especially when the stakes are large and the difference between 24% withheld and 37% owed can equal hundreds of thousands or millions of dollars [4] [7].