Before you see a dollar of lottery winnings, the IRS will take 25%. Up to an additional 13% could be withheld in state and local taxes, depending on where you live. Still, you’ll probably owe more when taxes are due, since the top federal tax rate is 37%. So the best first step lottery winners can take is to hire a financial advisor who can help with tax and investment strategies. Read on for more about how taxes on lottery winnings work and what the smart money would do.

How Are Lottery Winnings Taxed?

The IRS considers net lottery winnings ordinary taxable income. So after subtracting the cost of your ticket, you will owe federal income taxes on what remains. How much exactly depends on your tax bracket, which is based on your winnings and other sources of income, so the IRS withholds only 25%. You’ll owe the rest when you file your taxes in April.

The Trump Tax Plan dropped the highest tax bracket rate from 39% to 37%, so recent winners (and high earners) have caught a small break. You can find your bracket on the table below.

2018 – 2019 Tax Brackets Single Filers Married Filing Jointly Tax Rate $0 – $9,525 $0 – $19,050 10% $9,526 – $38,700 $19,051 – $77,400 12% $38,701 – $82,500 $77,401 – $165,000 22% $82,501 – $157,500 $165,001 – $315,000 24% $157,501 – $200,000 $315,001 – $400,000 32% $200,001 – $500,000 $400,001 – $600,000 35% $500,001+ $600,001+ 37%

On the bright side, if you’re in the top bracket, you don’t actually pay 37% on all your income. Federal income tax is progressive. As a single filer and after deductions, you pay:

• 10% on the first $9,700 you earn

• 12% on the next $29,775

• 22% on the next $44,725

• 24% on the next $76,525

• 32% on the next $43,375

• 35% on the next $306,200

• 37% on any amount more than $510,300

In other words, say you make $40,000 a year and you won $100,000 in the lottery. That raises your total ordinary taxable income to $140,000, with $25,000 withheld from your winnings for federal taxes. As you can see from the table above, your winning lottery ticket bumped you up from the 22% marginal tax rate to the 24% rate (assuming you are a single filer and, for simplicity’s sake here, had no deductions).

But that doesn’t mean you pay a 24% tax on the entire $140,000. You pay that rate on only the portion of your income that surpasses $84,200. In this case, that’s on $55,800. Your total tax bill would be $970 (10% of $9,700) + $3,573 (12% of $29,775) + $9,839.50 (22% of $44,725) + $13,392 (24% of 55,800) = $27,774.50. Usually, your employer would have withheld federal taxes from your paycheck, but if for some reason your employer didn’t, you would still owe $2,774.50 in federal taxes ($27,774.50 – $25,000).

Of course, if you were already in the 37% tax bracket when you win the lottery, you would have to pay the top marginal rate on all your prize money.

But these rules apply only to federal income tax. Your city and state may want a cut, too.

How Are Lottery Winnings Taxed by State?

Come tax time, some states will also take a piece of your lottery winnings. How large a piece depends on where you live. The Big Apple takes the biggest bite, at up to 13%. That’s because New York State’s income tax can be as high as 8.82%, and New York City levies one up to 3.876%. Yonkers taxes a leaner 1.477%. If you live almost anywhere else in New York State, though, you’d be looking at only 8.82% in state taxes, tops.

Of states that have an income tax, rates can span from about 2.9% to 8.82%. Nine states, however, don’t levy a state income tax. They are:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming

If you live in one state and buy a ticket in another, typically the state where the ticket was bought (and the prize paid) will withhold its taxes at its rate. You will have to sort out how much you actually owe to your state at tax time (you will receive a credit for the amount already withheld–and the states will sort out who gets what between them).

These examples reflect possible outcomes from taking your winnings as a lump sum. In most cases, however, your options include taking your earnings as a series of monthly payments.

Should I Take a Lump Sum or Annuity Lottery Payments?

The answer depends on your preferences. Most financial advisors recommend you take a lump sum, because it allows you to receive a larger return if you invest it in growth-oriented assets such as stocks. You may also want all the money to be able to buy a big-ticket item like a car, house or island, if your winnings are large enough.

Winners of small jackpots, though, may want to receive their winnings in annual or monthly payments, especially if it means they’ll owe less in taxes. Or they may prefer the steady stream of cash to ensure they don’t make the common mistake of blowing through all or most of their winnings. If you do take the annual or monthly payments, you should still work with an advisor on how to best use that money stream. For example, you’d probably want to prioritize contributing to your retirement savings account. If you don’t have one, winning the lottery may be a golden opportunity to open an individual retirement account (IRA) or Roth IRA.

In any event, you’d want to stash some cash for emergencies, taxes and other expenses down the road. Below, we provide links to reports on the best savings accounts, certificates of deposit (CDs) and investing vehicles:

• Best savings accounts

• Best CD rates

• Best robo-advisors

• Top investing apps

How to Minimize Your Tax Burden After You Win the Lottery

Taxes on lottery winnings are unavoidable, but there are steps you can take to minimize the hit. As mentioned earlier, if your award is small enough, taking it in installments over 30 years could lower your tax liability by keeping you in a lower bracket.

Also, you could donate to your favorite non-profit organizations. This move allows you to take advantage of certain itemized deductions, which, depending on your situation, could bring you into a lower tax bracket.

Additionally, if you are sharing your good fortune with family and friends, you’ll want to avoid paying a gift tax. You can gift up to $15,000 per year per person without owing a gift tax. If you go over the limit, you probably still won’t owe tax, since the Tax Cuts and Jobs Act raised the lifetime gift and estate tax exclusion to about $11.4 million for single filers ($22.8 million for married couples filing jointly). Any amounts over the $15,000 per year per individual will count toward the lifetime exclusion.

If you anticipate coming close to the limit, though, remember that direct payments to colleges and universities don’t count as gifts; neither do direct payments to medical institutions. Also, if you are married, each of you can contribute $15,000 to a person, so that is $30,000 per year that is gift-tax free. Also, if the recipient is married, you and your spouse can give the spouse $15,000 each, which means you can give a total $60,000 to a couple, gift-tax free.

What to Do After Winning the Lottery

Winning the lottery, especially if it’s a large sum, can be a life-altering event for some. What you do next can put you on the path to financial wellness for the rest of your life. Or it can put you on the roller coaster ride of your life that leaves you broke.

Perhaps the best thing to do with your winnings at first is nothing. Take time to figure out how this windfall affects your financial situation. Calculate your tax liability with an accountant and earmark at least what it will take to cover the tax bill. Then comes the fun part: creating a blueprint of how you’re going to manage the rest of the cash.

But don’t go it alone. Work with a qualified financial advisor who can help you preserve and grow the money. After all, no matter how large your winnings are, they aren’t infinite. So making smart investments is key to your having enough money for the rest of your life.

Tips on Finding the Right Financial Advisor

• Use SmartAsset’s pro matching tool. After you answer a few questions about your financial situation in about five minutes, the tool links you with up to three financial advisors in your area. You can then review their profiles or set up interviews before deciding to work with one.

• Ask advisors about their certifications. In addition to telling you about the advisor’s training, these designations inform you about the advisor’s standards. For example, a certified financial planner (CFP) is bound by the fiduciary duty to provide advice in the client’s best interest at all times. Read our story to learn more about the top financial certifications.

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