It’s easy to get caught up in the excitement of a big win. But before you start spending, remember that lottery prizes, gambling winnings and many other awards are almost always treated as taxable income. Understanding the rules now can help you avoid surprises when you file your 2026 return next year.
Lottery prizes
While the odds of hitting a jackpot are low, many people win smaller prizes that have a similar impact on their taxes. For federal purposes, lottery winnings are taxable. This is the case for both cash prizes and the fair market value of noncash prizes, such as a vehicle or vacation. Depending on the amount won, the winnings could push you into a federal tax bracket as high as 37%. Your winnings may also be subject to your state income tax.
You must report lottery winnings as income in the year, or years, you actually receive them. For non-cash prizes, you would pay taxes in year you receive the prize. If you choose to receive cash in annual installments, each payment is reported as income in the year received.
Gambling winnings
For federal tax purposes, all gambling winnings are generally taxable, whether they come from the casino, a bingo hall or any other activity. You must report 100% of your winnings on your tax return. They will appear on the “Other Income” line of your 1040. Your taxable winnings are measured by your net gain. For example, if a $50 bet at the racetrack turns into a $150 win, you’ve won $100, not $150.
The IRS requires DraftKings, FanDuel or PrizePicks to issue a Form 1099-MISC to sport betters if they have net winnings (total payouts minus total wagers/entry fees) for the calendar year that hit or exceed $600. Your tax liability is triggered by realized gains, regardless of whether you have withdrawn the funds from your account.
If you have gambling losses, keep track of them separately. They may be deductible, but only if you itemize deductions on your return. Taxpayers who claim the standard deduction cannot deduct gambling losses.
Before 2026, you could deduct up to 100% of your gambling losses against your gambling winnings. However, under the One Big Beautiful Bill (OBBB) passed in July 2025, you can only deduct up to 90% of your gambling losses. For example, you bet $10,000 during March Madness. A $100 bet pays off big, winning you $10,000. However, you lose the remaining $9,900 in bets. You have $9,900 in gambling income and $9,900 in gambling losses. If you made these bets in 2025, you would have ZERO net taxable income from gambling. You could deduct the $9,900 in gambling losses against your $9,900 in gambling winnings. However, your tax calculations change under the new 2026 tax bill.
Under the new rule for tax year 2026, you could not claim the full $9,900 in gambling losses. You can only claim up to 90% of your deductions against your winnings ($9,000 x 90% = $8,910). You must pay your ordinary income tax rate on the gambling income that exceeds 90% of your gambling losses ($990 = $9,900 – $8,910).
Good recordkeeping is very important. Keep a ledger of your gambling activity that includes the date, location, type of wager, amounts won or lost, and the names of anyone who was with you. Save supporting documents such as tickets, receipts, canceled checks, credit card statements, and casino win/loss statements. Good records can make for a much easier and quicker examination if the IRS asks for documentation.
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, the payer is generally required to withhold 24% for federal tax purposes. You’ll receive a Form W-2G 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. Keep in mind, the 24% withholding may not fully cover your federal tax liability. Therefore, you may have to make estimated tax payments to cover the rest of the liability. If these estimated payments are not made timely, penalties may be assessed.
Overview
Lottery, gambling, or other winnings can increase your tax liability and may even require estimated tax payments. Depending on where you live, state and local taxes may also apply. If you have received a significant payout, you may want to revisit your financial and estate plans. Feel free to contact your Wegner tax advisor if you have any questions. We are here to help evaluate your tax impact and plan accordingly.
