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How will taxes be handled for Mega Millions winnings in 2025 (federal and state)?
Executive Summary
Federal tax on Mega Millions winnings in 2025 begins with an automatic 24% withholding on prizes above the IRS threshold, but winners will likely owe additional federal income tax up to the top 37% marginal rate when they file; nonresident aliens face a higher flat withholding in many cases [1] [2]. State tax treatment varies widely: some states impose no tax on lottery winnings (for example Florida, Texas, California), while others levy income tax rates that can exceed 10% or withhold differently for in-state vs out-of-state purchasers; whether you take a lump-sum or annuity materially changes the timing and potentially the total tax paid [3] [4] [5].
1. How the federal bite is immediate but not final — withholding versus final tax bill
The IRS requires a 24% federal withholding on reportable lottery winnings above the statutory threshold, which reduces the cash delivered to winners at redemption but does not settle the full tax liability [1]. Winners who take the lump-sum option typically report the entire cash amount as ordinary income for that tax year, which will likely place a jackpot recipient into the upper federal bracket and create an ultimate federal tax rate of up to 37% on taxable income above the 2025 thresholds; the 24% withheld is a prepayment, not an exemption from the higher rate [2] [6]. Tax planning matters: deductions, filing status, and other income can shift the effective tax bill, and the difference between withheld and owed must be paid when the annual return is filed [7].
2. State taxes are the wild card — geography can change your take-home dramatically
State treatment of lottery winnings is highly variable and can materially alter net proceeds: some states do not tax lottery prizes at all, notably Florida and Texas and California traditionally do not tax lottery winnings, while other states and D.C. impose substantial top rates that can reach or exceed roughly 10% [2] [3]. A winner’s residency and the state where the ticket was purchased both matter: several states withhold for nonresidents or impose different rules on out-of-state winners; this produces complex cross-jurisdictional issues that may lead to credits, additional filings, or unexpected withholdings [3]. State rules also change, so winners must consult up-to-date state guidance before assuming their state tax position [2].
3. Lump sum versus annuity — timing and tax-bracket management
Choosing a lump sum means the entire taxable amount generally counts in one year, often triggering the top federal bracket and maximizing immediate tax owed; a 30-year annuity spreads taxable income over decades and may reduce year-to-year bracket impact, though the cumulative federal and state tax paid over time could be higher or lower depending on future tax law changes, inflation, and investment returns [4]. With an annuity, each payment is taxable when received and may keep a winner out of the top bracket annually, but heirs, estate implications, and changing rates create trade-offs. Tax advisers frequently model both paths because the choice alters timing, estate consequences, and planning options including charitable giving and deferral strategies [4] [7].
4. Nonresident and special withholding rules — expect differences for internationals and certain states
Non-U.S. residents who win a U.S. lottery often face different withholding rules; federal withholding can be a flat 30% for certain foreign winners, and some states also impose their own withholding rules for nonresidents, which can sharply lower an international winner’s immediate payout [2]. Additionally, certain states require withholding even when the winner is a nonresident or when the ticket was purchased in-state, and a handful of states (for example Arizona and Maryland in recent practice) tax out-of-state ticket purchasers differently — creating potential double-filing and complex credit calculations to avoid double taxation [3]. Winners should expect multi-jurisdictional filings and possible refunds or additional taxes when they reconcile returns.
5. What common analyses agree on — core facts and practical steps
Across recent professional guides and jackpot analyses there is consensus on several points: lottery proceeds are ordinary taxable income, the IRS’s 24% withholding is only an initial payment toward a potential 37% tax liability, state rules vary and can dramatically change net proceeds, and choosing between lump sum and annuity drives tax timing and planning needs [7] [6]. Advisers recommend immediate engagement of a tax attorney, CPA, and financial planner to structure withholding elections, gift and estate planning, and charitable strategies to mitigate taxes within the law, because the initial withholding rarely equals the final tax bill [5] [1].
6. Disagreements, open questions, and what winners should verify right away
Sources differ mainly on projected effective tax totals because calculations depend on the chosen payout, residency, and deductible strategies; some analyses emphasize that annuities might reduce peak-year taxes while others warn cumulative taxes can be higher if rates rise [4] [2]. Winners should verify current 2025 federal tax brackets, the state lottery and income tax statutes where the ticket was purchased and where the winner resides, and whether special withholding applies to nonresidents — and confirm those facts with state revenue and lottery agencies as rules and withholding rates can change [2] [3].