Illinois Lottery winnings are taxed as ordinary income on both your federal and state returns. Illinois applies its flat 4.95% income tax to the full prize, and the IRS taxes winnings at your marginal federal rate, which climbs to 37% on taxable income above $640,600 for a single filer in 2026.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The lottery takes some of that out upfront, but withholding almost never covers the full bill on a large prize.
What Gets Withheld Up Front
When a single prize is more than $5,000, the Illinois Lottery withholds 24% for federal tax and sends it to the IRS.2Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026) On top of that, Illinois withholds 4.95% from any single payment of $1,000 or more, whether you live in the state or were just passing through when you bought the ticket.3Illinois Department of Revenue. Pub-130, Withholding Illinois Income Tax for Lottery or Gambling Winnings So just under 29% of a large prize disappears before you touch it.
That 24% federal piece is a prepayment, not a settlement. A multi-million-dollar jackpot blows past the $640,600 threshold almost immediately, which means most of the prize is actually taxed at 37% while only 24% was withheld. The 13-percentage-point gap on millions of dollars becomes a six- or seven-figure balance due the following April. Plan for it.
Illinois’s Flat 4.95% Rate
Illinois taxes individual income at a flat 4.95%, with no brackets and no phase-outs.4Illinois Department of Revenue. Income Tax Rates Multiply your prize by 0.0495 and you have your state tax. No Illinois municipality adds its own income tax, so 4.95% is the complete state-level cost.
Smaller lottery prizes under the $1,000 state withholding threshold or the $5,000 federal threshold still count as taxable income on both returns. The lottery just isn’t required to withhold or issue paperwork for those amounts. You still owe the tax.
Avoiding an Underpayment Penalty
The IRS wants tax paid as income is earned, not in a single April check. If you sit on the shortfall until the filing deadline, you’ll likely owe an underpayment penalty on top of the tax. Quarterly estimated payments using IRS Form 1040-ES are the standard fix.5Internal Revenue Service. Estimated Taxes
The IRS waives the underpayment penalty if you owe less than $1,000 at filing, or if you’ve paid at least 90% of the current year’s tax or 100% of last year’s tax, whichever is less. If your prior-year adjusted gross income exceeded $150,000, the second threshold rises to 110% of the prior year’s tax.6Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty For a first-time winner with a modest return the year before, the 110% test may be easy to meet, but on a true jackpot it’s the 90%-of-current-year calculation that actually controls. Run those numbers early.
If you miss the deadline, the IRS charges 0.5% of the unpaid amount for each month or partial month the balance is outstanding, up to 25%, plus interest.7Internal Revenue Service. Failure to Pay Penalty Paying what you can before April through 1040-ES or IRS Direct Pay keeps those charges from compounding.8Internal Revenue Service. About Form 1040-ES, Estimated Tax for Individuals
Deducting Gambling Losses
Federal and Illinois rules diverge sharply here, and the 2026 federal change is worth knowing before you file.
Federal: Capped at 90% in 2026
You can deduct gambling losses, including the cost of losing lottery tickets, against your winnings on your federal return. Starting in 2026, that deduction is capped at 90% of your gambling winnings for the year, down from the full 100% allowed previously. The cap came out of the One, Big, Beautiful Bill signed in 2025. If you spent $10,000 on tickets and won $10,000, you can only deduct $9,000, leaving $1,000 taxable even though you broke even. You also have to itemize on Schedule A to claim it at all, so the deduction does nothing if you take the standard deduction. Keep tickets, receipts, and wager records.
Illinois: No Deduction
Illinois does not allow any subtraction for gambling losses on the state return.9Illinois Department of Revenue. What Other Income Is Not Allowed as a Subtraction on My Individual Income Tax Return Every dollar of your winnings is taxed at 4.95% with no offset. An active gambler whose federal return nets close to zero can still owe meaningful Illinois tax.
Lump Sum or Annuity
Most large Illinois jackpots give you a choice between a single lump-sum payment and roughly 30 years of annual installments. The advertised jackpot is the same either way; the tax outcome is not.
The lump sum is the present cash value of the prize, well below the headline figure. The whole amount lands on one year’s return, almost all of it in the 37% federal bracket. Combined with 4.95% Illinois tax, you lose roughly 42% to income tax alone. The upside is immediate control of the after-tax money and the investment flexibility that comes with it.
The annuity splits the prize into annual payments, each taxed in the year received. A huge jackpot will still push each installment into the top bracket, but a moderately sized prize may keep individual payments at 32% or 35%, saving real money over 30 years.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The annuity also structurally prevents a one-year spending spree.
One estate issue to flag: if an annuity winner dies before the final payment, the remaining installments pass to the estate, and the IRS values them at present value for federal estate tax purposes. On a very large jackpot, that valuation can push the estate above the federal exemption and create a tax bill the heirs must pay while they’re still waiting on the yearly checks. An estate attorney is worth the fee before you choose.
Forms You’ll Receive and File
The Illinois Lottery reports your prize and the taxes withheld on IRS Form W-2G, with copies to you and the IRS.2Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026) The form shows gross winnings, federal tax withheld, and Illinois tax withheld.
On your federal return, report the winnings on Form 1040, typically through Schedule 1 as other income, and claim the withholding as a credit against your tax. On your Illinois return, file Form IL-1040 and attach Schedule IL-WIT along with the W-2G to document the state withholding.10Illinois Department of Revenue. 2025 Form IL-1040 Instructions
Group Tickets and Office Pools
When two or more people share a winning ticket, the person claiming the prize completes IRS Form 5754 identifying each winner and their share. The lottery then issues a separate W-2G to each person based on that allocation.11Internal Revenue Service. Form 5754, Statement by Person(s) Receiving Gambling Winnings
Skipping Form 5754 is a serious mistake. Without it, the IRS treats the full prize as income to the single claimant, who then appears to be gifting shares to the others. That can trigger federal gift tax reporting on amounts over the $19,000 annual exclusion per recipient in 2026.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A written agreement signed before the drawing, laying out each person’s share, is the cleanest proof.
Note that Illinois withholding applies to the full single payment, not to each person’s slice. A $3,000 prize split three ways still has 4.95% withheld on the full $3,000 because that payment exceeds the $1,000 threshold, even though each individual share is only $1,000.3Illinois Department of Revenue. Pub-130, Withholding Illinois Income Tax for Lottery or Gambling Winnings
If You Live Out of State
Buy a winning Illinois ticket while living elsewhere and you still owe Illinois tax. The income is sourced to the state where the ticket was purchased, so the lottery withholds 4.95% the same way it would for a resident.4Illinois Department of Revenue. Income Tax Rates
You then report the full prize on your home state’s return. Most states offer a credit for taxes paid to another state, so you claim the 4.95% paid to Illinois against your home state’s tax on the same income. If your home rate is higher than 4.95%, you owe the difference at home. If your home state has no income tax, the 4.95% to Illinois is your entire state cost.
Non-residents file Illinois Form IL-1040 with Schedule NR attached. Lottery winnings go on Schedule NR, Line 19, Column B as Illinois-sourced income.12Illinois Department of Revenue. 2025 Schedule NR, Nonresident and Part Year Resident Computation of Illinois Tax
A Note on Privacy
Separate from taxes, Illinois lets winners of prizes of $250,000 or more request that their name and city be kept confidential, but you must make the request on the Winner Claim Form when you claim the prize.13Illinois Lottery. Claiming Game Prizes Below that threshold, no confidentiality option is available. Either way, your tax reporting obligations stay the same.