Winning the lottery or hitting a big jackpot is thrilling, but the IRS sees it differently. Under federal tax law, lottery prizes, gambling winnings, and most awards are treated as ordinary taxable income.
Understanding these rules now can help you plan ahead and avoid unexpected tax bills when you file your 2026 return.
Lottery prizes
Of course, the chances of winning big in the lottery are slim. But many people win smaller, yet not insignificant, amounts that can increase their tax liability — in some cases, substantially.
Lottery winnings are taxable for federal purposes. This is the case for both cash prizes and the fair market value of noncash prizes, such as a car or vacation. Depending on the amount won and your other income, the winnings could push you into a federal tax bracket as high as 37%. Your winnings may also be subject to state income tax.
You must report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year you receive the prize. With cash, if you take the winnings in annual installments, you report each year’s installment as income for that year.
Gambling winnings
For federal tax purposes, it does not matter if you win at the casino, a bingo hall or elsewhere. You must report 100% of your gambling winnings as taxable income. They are reported on an “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $50 bet at the racetrack turns into a $150 win, you have won $100, not $150.
You must separately keep track of losses. They may be deductible, but only if you itemize deductions. Therefore, if you take the standard deduction, you can’t deduct gambling losses.
In addition, you can deduct only 90% of gambling losses, and only up to the amount of gambling winnings. So if your losses exceed your winnings, you might be able use losses to “wipe out” gambling income — but you can not offset other income with the losses.
Maintain good records of your losses during the year. Keep a detailed diary in which you note the date, place, amount and type of loss, as well as the name of anyone who was with you. Save all documentation, such as checks or credit slips.
Note: Different rules apply to people who qualify as professional gamblers.
Withholding and estimated tax payments
If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You will receive a Form W-2G from the payer (lottery agency, casino, etc.) showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax is withheld, that amount may also be shown on Form W-2G.
Because your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments to cover the rest of the liability — and you might be assessed a penalty if you fail to do so.
Have you won big?
A big win can significantly increase your income taxes and may trigger estimated tax payments for the year. (Keep in mind there could also be state and local tax implications.) If your winnings are substantial, it’s worth reviewing your overall wealth strategy and updating your estate plan. If you have questions about what this means for you, reach out to your Rudler PSC advisor. We are here to help you understand the tax impact and stay on track with your obligations.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Brandon Hughes, Senior Accountant and Karen Daugherty, CPA.
If you would like to discuss your particular situation, contact Brandon or Karen at 859-331-1717.
As part of Rudler, PSC's commitment to true proactive client partnerships, we have encouraged our professionals to specialize in their areas of interest, providing clients with specialized knowledge and strategic relationships. Be sure to receive future Rudler Reviews for advice from our experts, sign up today !