BEFORE YOU SPEND YOUR WINNINGS, UNDERSTAND THE TAX RULES
It’s natural to get caught up in the thrill of a big win. But under federal tax law, lottery prizes, gambling winnings, and most other awards are treated as taxable income. Knowing the basics now can save you from an unwelcome surprise when you file your 2026 tax return next year.
HOW LOTTERY PRIZES ARE TAXED
While hitting a massive jackpot is unlikely, many people win smaller — yet still meaningful — amounts that can significantly increase their tax bill.
For federal tax purposes, all lottery winnings are taxable, whether you receive cash or a noncash prize like a car or vacation. The IRS taxes the fair market value of noncash prizes in the year you receive them. Depending on how much you win and your total income, your winnings could push you into a federal tax bracket as high as 37%. State income taxes may apply as well.
You report lottery winnings in the year you actually receive them. If you choose annual installments, you report each payment in the corresponding tax year. For noncash prizes, you report the value in the year the prize is delivered.
HOW GAMBLING WINNINGS ARE TAXED
From casinos and racetracks to bingo halls and online sportsbooks, 100% of your gambling winnings must be reported as taxable income. You’ll list them on the “Other income” line of your Form 1040.
To calculate your winnings on a single wager, use the net gain. For example, if you bet $50 at the track and collect $150, your taxable win is $100 — not $150.
Gambling Loss Deductions: What’s Changed for 2026
Gambling losses are handled separately from winnings. You may be able to deduct them, but only if you itemize deductions on Schedule A. If you take the standard deduction, you cannot deduct gambling losses at all.
Under new rules effective for the 2026 tax year, you can deduct only 90% of your gambling losses, and only up to the amount of your gambling winnings. That means if your losses equal or exceed your winnings, you can offset most — but not all — of your gambling income. You cannot use gambling losses to reduce other types of income.
Important: Keep detailed records of your losses throughout the year. The IRS expects a diary noting the date, location, amount, and type of each loss, plus the names of anyone with you. Save all supporting documents such as tickets, checks, and credit slips.
Note: Professional gamblers are subject to different tax rules.
WITHHOLDING AND ESTIMATED TAX PAYMENTS
If you win more than $5,000 from the lottery or certain gambling activities, the payer must withhold 24% for federal taxes. You’ll receive a Form W-2G showing the amount paid to you and the tax withheld. The payer also sends this information directly to the IRS. Any state tax withheld may appear on the form as well.
Here’s the catch: because your actual federal tax rate can be as high as 37%, the 24% withheld may not cover your full tax liability. If that’s the case, you may need to make estimated tax payments to avoid owing a balance — and potentially a penalty — when you file.
PLAN AHEAD IF YOU’VE WON BIG
Significant lottery, gambling, or prize winnings can raise your income tax bill and trigger estimated tax obligations. Depending on where you live, state and local taxes may also apply.
If your winnings are large enough, it may be time to revisit your wealth management strategy and update your estate plan. If you have questions about the tax impact or need help meeting your obligations, contact our office. We’ll help you understand what you owe and how to stay compliant.
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