Arizona Lottery Tax Calculator - 2.5% State Tax

Arizona imposes a flat 2.5% state income tax rate on all lottery winnings, applied to residents who claim prizes at Arizona Lottery headquarters or play lottery games in Arizona. This 2.5% is in addition to federal taxes, making Arizona's overall tax burden on lottery wins very competitive compared to high-tax states. For a $60 million lump-sum jackpot, Arizona's 2.5% state tax equals $1.5 million—significantly less than many other states.

Your lottery tax bill is the sum of: (1) Federal tax (37% on large wins), (2) Arizona state tax (2.5%), and (3) the immediate 24% federal withholding. On a $100 million advertised jackpot (roughly $60 million lump sum), you'd owe approximately $22.2 million federally (37%) plus $1.5 million for Arizona (2.5%), totaling $23.7 million in taxes. The lottery withholds $14.4 million (24%), leaving a tax gap you must pay by April 15th.

The 24% federal withholding is NOT your final federal tax bill. It's just what the lottery is required to withhold. Your actual federal tax liability on lottery winnings is progressive, reaching 37% for high-income brackets. Arizona then adds 2.5% on top of this. So on a $60 million lump sum: you'd have $14.4 million withheld federally (24%), but you'd actually owe roughly $35.7 million combined (37% federal + 2.5% Arizona = 39.5%). This underscores why professional tax planning is essential before claiming a prize.

Arizona taxes lottery winnings the same whether you take a lump sum or annuity: 2.5% state tax applies to the full amount in either case. The key difference is timing and federal tax planning. A lump sum is a one-time event subject to the 37% federal rate all at once. An annuity spreads payments over 30 years, potentially reducing your federal tax bracket in any given year. However, both are subject to Arizona's 2.5% state tax.

The Arizona Lottery, established in 1981, is operated by the state and funds education. A portion of lottery revenue goes to schools, which is why the state taxes lottery winnings—it's part of the funding model. Arizona's 2.5% tax rate is one of the lowest for states that tax lottery winnings, making it an attractive place to play compared to higher-tax neighbors.

If you win the Arizona lottery: (1) Don't claim immediately—consult a tax attorney and CPA first. (2) Consider forming an LLC or trust to claim the prize (if permitted by Arizona Lottery rules) to protect privacy and potentially optimize the claim structure. (3) Calculate your full federal and Arizona tax liability using our calculator above. (4) Arrange financing to cover the tax gap (difference between 24% withheld and actual taxes owed). (5) Work with a CPA to strategize federal tax minimization. (6) Understand Arizona's residency requirements; if you move, you may owe taxes to your new state on future income.

Arizona's 2.5% state tax on lottery winnings is very low: (1) No tax: CA, DE, FL, NV, NH, SD, TN, TX, WA, WY. (2) Comparable (2.5-3%): North Dakota (2.9%), Pennsylvania (3.07%), Indiana (3.15%). (3) Higher: Colorado (4.4%), New York (10.9%), New Jersey (10.75%), Maryland (8.95%), Oregon (9.9%). Arizona's 2.5% rate is extremely competitive, saving winners millions compared to high-tax states.