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“We just won $2 million. The lottery already took out the taxes. We’re set, right?”
Let’s say that’s Frank and Joan, both 67, married and retired, who just took the $2 million cash option on a lottery jackpot. They’re a hypothetical couple. The tax trap they’re about to walk into is very real.
I’ve been a CPA since 1981, and a windfall is one of the fastest ways to turn a good problem into a bad one. The trouble starts with that word “already.”
When lottery winnings minus the wager top $5,000, the payer must withhold federal income tax, and the regular gambling withholding rate is 24%, according to the IRS. (1) But withholding isn’t the tax. Gambling winnings are fully taxable, and you must report them on your return. (2)
For 2026, the top federal rate is 37% for married couples with taxable income over $768,700. (3)
And two years after a big win, Medicare can come calling, too. Higher-income beneficiaries pay more for Part B (4), and Social Security generally uses the tax return from two years earlier to decide who pays it. (5)
Here are 5 things Frank and Joan — and anyone who comes into a windfall in retirement — need to know.
1. The 24% withheld isn’t the bill
Here’s the math, using 2026 federal brackets for a married couple filing jointly and assuming $2 million of taxable income. (3)
The lottery withholds 24%, or $480,000. (1) But because so much of that $2 million lands in the 35% and 37% brackets, the federal tax works out to about $662,000. That leaves roughly $182,000 still owed when they file — before any state income tax.
2. Don’t spend a dime until the tax money is set aside
My advice to any new winner: move the money somewhere safe and boring, set aside the extra tax first, and make no big decisions for a while. The house, the car and the gifts to family can wait a few months.
This is exactly when a professional earns their fee and the perfect time to talk to one. A free service like SmartAsset matches you with up to three fiduciary financial advisors, who are legally required to put your interests first. It’s aimed at people with $100,000 or more in investments.
The questionnaire takes about 10 minutes and asks for a phone number near the end, but you control whether and when you respond to anyone. SmartAsset only makes the match; the advice comes from the advisor you choose. Find a fiduciary advisor through SmartAsset.
3. Medicare’s surcharge arrives two years later
This is the surprise that’s easy to miss. Medicare’s income-related monthly adjustment amount generally uses your tax return from two years earlier. (5)
Using 2026 figures, the standard Part B premium is $202.90 a month.
For joint filers with modified adjusted gross income of $750,000 or more, it’s $689.90 a month per person. (4) For Frank and Joan, that’s an extra $487 a month each, or $11,688 for the year — for Part B alone.
Social Security can make a new decision after certain life-changing events, such as marriage, divorce, the death of a spouse or stopping work. (5) A lottery win isn’t on that list.
Quick gut-check — if your money advice is coming from random online influencers, you’re playing a dangerous game. I’ve been a CPA since 1981 and writing about money since before the internet existed. Sign up for the free Money Talks Newsletter and get expert advice that’s been tested by time.
4. Know the gift rules before you share the money
Winners want to help their kids and grandkids, and that’s wonderful. Just know the numbers first.
For 2026, the annual gift tax exclusion is $19,000 per recipient. (6)
The basic exclusion amount for estates of people who die in 2026 is $15,000,000. (3) For most families, including Frank and Joan, that means gift and estate tax likely won’t be the problem. Paperwork and family fights might be.
That's another reason to talk to a pro before you write big checks, so you know what has to be reported and how to do it right.
5. Update your estate plan right away
A $2 million windfall changes who gets what if something happens to you. An old will — or no will at all — may not fit your new reality.
When you’re gone, your problems vanish — but your family’s nightmare is just beginning. Without a plan, courts decide everything, probate drags on for months, and loved ones are left guessing. Shield them with a will, a trust or both.
A will locks in exactly who gets what, and you can get one in minutes for $199. A trust goes further, controlling how and when heirs inherit. Those you can find starting at just $499.
My honest take
Most people dream about winning. Almost nobody dreams about the tax return that follows.
Frank and Joan aren’t real, but their problem is: a withholding check that looks like the whole bill, followed by a Medicare premium that jumps two years later.
If you ever come into a windfall — a jackpot, an inheritance, a big sale — slow down, set aside the taxes and get help before you spend.
A jackpot is the only bill that shows up wrapped like a present. Open it slowly.
Sources: 1. IRS (Instructions for Forms W-2G and 5754); 2. IRS (Topic 419); 3. IRS; 4. Centers for Medicare & Medicaid Services; 5. Social Security Administration; 6. IRS
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