Immediate Withholdings

• Anyone who wins a lottery prize of more than $5,000 faces an immediate taxation on the prize of 25 percent. Winners who fail to provide their Social Security number are taxed at 28 percent of their winnings. This tax is withheld by the lottery commission before it transfers funds to the prize winner, and is reported to the IRS.
  
  

Income Taxes

• Lottery jackpot winners and other winners of large awards may also change tax brackets when they receive a lottery payout. Lottery winnings are reported as "other income" on tax returns, and are likely to raise a winner into a higher income tax bracket. As of 2009 tax tables, taxpayers who earned more than $372,950 are assessed $108,216 plus 35 percent of the amount above $372,950. In short, lottery winners should expect to owe additional income taxes beyond withholdings taken at the time of winning.
  
  

Annuity Withholdings

• If a lottery winner opts to receive payments in annual installments, taxes are levied on each payment as they are received, rather than on the prize amount. Because of this, annuitized winnings for smaller state lotteries may face a more favorable tax rate than lump-sum distributions if they are spread over several years.
  
  

Future Tax Rates and Annuities

• Prizes awarded as an annuity are subject to withholding rates and tax tables of the year in which each award is given. Because of this, taxation on future installments may come at a significantly different rate if tax laws change.
  
  

Unearned Income

• Winners of large lottery jackpots may choose to invest the bulk of their earnings upon receiving them. Interest that accrues and dividends paid from these investments are also subject to taxes.