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If you ever hit a nearly $1 billion jackpot, the headline number might look life-changing. But what you actually keep depends heavily on where you live and how you claim your prize.
For residents of eight U.S. states, lottery winnings come with a major perk: no state tax on the windfall. If you live in California, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, a big lotto win translates to more take-home cash. (1)
That reality gives regular players in those states a better shot at walking away with more — but it doesn't change one crucial fact: the odds of actually winning remain staggeringly slim. Here’s why you may want to rethink playing the lotto — and divert your cash into something a little more surefire instead.
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How taxes affect what you get
Winners from any of the eight U.S. states not imposing taxes on lottery prizes would get the maximum payout, whether they choose a lump sum or a long-term annuity.
That said, even in those “lottery-friendly” states, you still owe Uncle Sam his share. The federal government withholds 24% immediately (2), and big jackpots push winners into the top income bracket, usually 37% federal tax. (3)
For example, someone from Colorado who wins $1.4 billion would see a cash lump sum (before federal tax) of about $371.7 million, or $821.7 million if they pick the 30-payment annuity option. (4) After federal taxes and no state deduction, winners living in the eight exempt areas would keep more than players from elsewhere.
Conversely, in states that do tax lottery winnings, withholdings typically range from about 4–6%, the Tax Foundation reports. And in high-tax places like New York, the rate can surpass 12%. (5)
That means a similar jackpot could net a New York winner tens of millions less than one in California or Florida.
Read More: 5 essential money moves to make once you’ve saved $100,000
Where players are spending (and winning)
Why do these differences matter beyond headline glamour and bragging rights? Because a huge slice of American households routinely spends money on lotteries.
In 2023 alone, Americans spent an average of $320 per person on lottery tickets, 4% more than the year before, LendingTree reports. (6) But some studies put total U.S. lottery spending much higher, closer to $100 billion per year. (7)
However you look at it, that’s a lot of money chasing odds that remain extremely long. For the massive jackpots in games like Mega Millions or Powerball, the odds of winning remain roughly 1 in 290 million. (8)
Of course, living in a state with no lottery tax significantly improves the potential “take home,” but the chances of it ever happening is remote — making most of that ticket spending a losing bet for the vast majority of people.
However, lottery play tends to hit lower-income Americans hardest. The Economist found adults living in the poorest 1% of areas spend nearly 5% of their income (about 6%) on lottery tickets each year, while those in the wealthiest 1% of areas spend about $150, or 0.15%, of their income on the same. (9)
Re-thinking where your lotto dollars go and how they grow
If you’re a regular ticket buyer, you might want to pause and ask: what if that money were invested instead of spent? The same $320 spent annually on lottery tickets could instead go into a balanced stock index, a retirement account or other investments.
Historically, the stock market has given far better odds at long-term growth (10) than the lottery offers at hitting the jackpot.
The power of compounding is simple and demonstrable. For example, tools from the U.S. Securities and Exchange Commission (11) show how modest monthly contributions grow substantially over decades — a far more reliable wealth-building strategy than repeated lottery play. For example, $320 invested each year for 20 years could net nearly $15,000.
Even for lifelong lottery players, this “tax-friendly jackpot advantage” doesn’t guarantee a thing. But it should prompt a second look at how you spend your money.
If your goal is growing wealth rather than chasing chance, reinvesting those ticket dollars could pay off more reliably over time.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
CNBC (1); TaxAct (2); SmartAsset (3); Fox News (4; Tax Foundation (5); LendingTree (6); Wharton UPenn (7); MegaMillions (8); The Economist (9); Nasdaq (10); U.S. Securities and Exchange Commission (11).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
