Federal Withholding on Powerball: The 24% Rule, Explained
Federal law requires the lottery to withhold 24% of any prize over $5,000 before paying the winner. The withholding is not the final tax — it is a down payment on what the IRS ultimately collects the following April.
When the 24% is applied
The lottery withholds 24% at the moment it cuts the claim-centre cheque. The gross number used for the calculation is the cash value (if lump sum) or the annual instalment (if annuity). The winner receives a W-2G form the next January showing the prize and the withholding.
Why the final tax is usually higher
Lottery winnings are ordinary income, so they stack on top of the winner's other income. Most lump-sum winners will have income that crosses the 37% top bracket; the lottery's 24% withholding falls roughly 13 percentage points short. The winner owes the shortfall on April 15.
State tax is withheld separately
Most states layer their own withholding on top — often at a rate below the state's top marginal rate. Cross-state winners may also owe back home; consult a CPA before spending any of the claim-centre cheque.