How to Shelter Lottery Winnings from Taxes

Winning the lottery is the ultimate dream, but the reality of managing those riches is a little less rosy. In America, the federal government takes a hefty chunk of taxes out of your winnings before you get your hands on the prize—and that’s just the beginning.

To avoid losing your jackpot to taxes, your first phone call after winning—OK, maybe after your family—should be to a reputable financial advisor or lawyer. Professionals like these can help secure as much of that sweet cash as possible for you and your family. To get you started, here are the basics of how to shelter your lottery winnings from taxes.

How Much Are Lottery Winnings Taxed?

How to Shelter Lottery Winnings from Taxes Winner ScreamingWinning the lottery doesn’t mean you get to take home a check for the entire jackpot amount. Right off the bat, the Internal Revenue Service (IRS) collects 25% of lottery prizes of $600 and up—or if you win 300 times what you paid to play (for example, winning a $900 prize on a $3 ticket). But that’s just the beginning. If you own any child support or have any liens against you, the IRS can take a cut of your lottery winnings before you even see them.

Then, when you file your next tax return, you’ll need to pay a regular income tax, and your income for the year will include your lottery prize. If your prize puts you in the top tax bracket because your income would be more than $500,000 (or $600,000 if you file taxes jointly with your spouse), you’ll need to pay a whopping 37% on any income above this threshold for the year. Plus, let’s not forget state taxes and, in some cases, even city taxes. (In case you’re wondering, here are the best states with the lowest lottery taxes.)

Some people assume that putting their winnings into a trust fund for their kids is a good way to avoid paying taxes. However, the American government does not allow anyone to transfer their income to another person. If you put your money in a trust fund, you will still need to pay taxes on the money in the year that you transfer it to the fund.

The good news is that there are other ways to shelter your winnings from the taxman. Read on to find out how.

Decide If You Want the Lump Sum or Annuity Payments

In addition to advising you on which banks you can trust with your winnings, your financial advisor will help you choose whether to collect your prize as a lump sum or as yearly payments. There are benefits to both options.

If you win a smaller prize that could be paid out in bite-sized instalments each year, then it may be a good idea to choose annuity payments. Opting for the smaller yearly payments could significantly reduce how much you pay in taxes because the lottery money will not push your yearly income into the highest tax bracket.

On the other hand, if you are the lucky winner of a multi-million-dollar prize, many advisors recommend choosing the lump sum option. Collecting the large prize all at once means that you will pay a good amount in taxes up front. However, if you invest your winnings right away, the returns on your investments will be able to earn back much of what you lost to taxes.

Reduce Your Lottery Taxes by Donating Money

When you donate money to a non-profit organization or charity, you may be able to put that donation down as a deduction on your taxes. Under the CARES Act, 100% of your “charitable giving” to a qualifying charity can be deducted if you itemize your tax return. Donations must go to a 501(c)(3) public charity or private foundation to qualify.

Reduce Your Lottery Taxes by Gifting Money to Friends and Family

Another time-honored way to shield your lottery prize from taxes is to gift some of it away each year. If you collect your prize as an annuity and gifting some of it would keep you in a lower tax bracket, this tactic could help you save a significant amount on taxes.

Current US law allows you to gift up to $15,000 each year. If you’re married, then you and your spouse can each gift that amount for a total of $30,000 each year to reduce your yearly income taxes. When gifting to family members, there are also some clever workarounds to help you minimize how much you need to pay to the taxman.

Reduce Your Taxes with a Lottery Trust

Lawyer Holding Irrevocable Lottery Trust DocumentThere are many benefits to having a lawyer set up a lottery trust. A lottery trust can be used to collect your winnings anonymously, to split a jackpot among multiple winners, and to shelter your prize from taxes.

If you put your winnings in an irrevocable trust, ownership of the money is transferred to the person in charge of the trust. Putting your money in this kind of trust therefore removes it from your taxable estate. If you invest any of this money after it’s in the trust, you won’t be expected to pay taxes on the income earned through those investments. An irrevocable trust also protects money from creditors and lawsuits, since the trust cannot be cancelled without agreement from all the payees. (Read more about why big winners need lottery trusts here.)


While the US government doesn’t allow lottery winners (or anyone else) to hide their money in a trust fund and not pay taxes on it, there are other ways to shield some or all of your winnings from taxes. If you win a big jackpot, the best way to protect your prize from the taxman—and protect yourself from unwanted attention—is to have a team of professionals set up a lottery trust and oversee a wise investment strategy from there.

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