Kentucky lottery tax: a lower flat rate for 2026
Kentucky cut its flat income tax rate to 3.5 % for 2026, and lottery prizes follow it. The lottery withholds the same percentage on large prizes.
- Flat rate 2026
- 3.5 %
- Withholding
- 3.5 % above $5,000
- Standard deduction, single
- $3,360
- Credit
- Schedule ITC, Section A
State and local tax, ticket bought in Ohio
$10,500
Bought at home in Kentucky: $10,500. Difference: $0.
| Prize this year | $300,000 |
| Federal income tax (top rate reached 35 %) | $84,114 |
| Ohio tax as a nonresident | $7,653 |
| Kentucky tax before credit | $10,500 |
| Credit for the Ohio tax | -$7,653 |
| Withheld when the prize is paid | $80,250 |
| Still to pay with the return | $14,364 |
| After all taxes | $205,386 |
Ohio taxes nonresidents on prizes of its lottery. Kentucky credits the tax paid to Ohio, up to its own tax on the prize.
Compiled by Radif Partners · How we calculate · brackets, state rates and lottery rules read on official sites · estimate, not tax advice
For tax year 2026 Kentucky taxes income at a single rate of 3.5 %, lower than the 2025 rate, and KRS 154A.110 makes the proceeds of a Kentucky Lottery prize subject to that tax. After the $3,360 standard deduction for a single filer, a resident who wins $40,000 owes Kentucky $1,400 on it, and $8,150 to the IRS at the 2026 brackets. The Kentucky Lottery withholds state and federal tax from every prize over $5,000; the state part is 3.5 % of the proceeds, the prize minus the cost of the ticket, so on a large prize the withholding matches the tax almost exactly. Nonresidents owe Kentucky on Kentucky Lottery prizes, and the reciprocal agreements that cover wages do not cover gambling income. An Ohio resident who wins $300,000 on a Kentucky ticket pays Kentucky $10,402. Residents who win elsewhere use Schedule ITC to credit the other state's tax, and must file that state's return.
Your prize after Kentucky tax
Lump sum after all taxes
$30,450
| Prize this year | $40,000 |
| Federal income tax (top rate reached 22 %) | $8,150 |
| Kentucky tax | $1,400 |
| Withheld when the prize is paid | $11,000 |
The rate cut and what it means for a prize
The Department of Revenue's 2026 withholding formula applies 3.5 % to all taxable wages, the rate set for tax year 2026 under the schedule of reductions enacted in 2025 (2026 Kentucky Withholding Tax Formula). Kentucky has no brackets, so a prize is taxed at that rate from its first dollar once the standard deduction of $3,360 has been used by other income. The lottery statute, KRS 154A.110, states that the proceeds of lottery prizes are subject to the state income tax (KRS 154A.110). On the $170.3 million cash value of the October 20, 2026 Mega Millions jackpot, a single Kentucky resident would owe the state $5,960,500, against $62,978,180 of federal tax, and keep $101,361,320.
Kentucky's personal tax credits replace a personal exemption, and the treatment of a joint return's standard deduction was not confirmed in the 2026 materials read, so the examples on this page use single filers.
Withholding on proceeds, not on the prize
Employer instructions 42A003, revised in March 2026, tie gambling withholding to the federal rules: when federal withholding applies, the payer withholds Kentucky tax at the maximum rate of KRS 141.020, now 3.5 %, on the proceeds, meaning the winnings minus the amount bet (Kentucky withholding instructions 42A003). For a lottery prize that happens above $5,000, and the Kentucky Lottery's terms state that state and federal tax are withheld from all prizes over that amount (Kentucky Lottery terms and conditions).
Because the rate is flat and equals the withholding, a Kentucky resident who claims a large prize usually owes the state little or nothing more in April; the federal side is where the balance appears. On the Mega Millions example the lottery holds $5,960,500 for Kentucky against $5,960,500 of tax, and $40,872,000 for the IRS against $62,978,180. Withholding against the tax due explains the federal gap.
Buyers from across the Ohio River
Louisville, Northern Kentucky and Ashland face Indiana and Ohio, and Tennessee lies along the southern line. The 2025 instructions for Form 740-NP require nonresidents to report lottery and gambling winnings from Kentucky sources, and add that gambling income is not exempt under Kentucky's reciprocal agreements and is fully taxable (Form 740-NP instructions).
| Situation | Kentucky | Other state | Kept |
|---|---|---|---|
| Ohio resident, Kentucky ticket | $10,402 | $597 | $204,887 |
| Indiana resident, Kentucky ticket | $10,402 | $0 | $205,484 |
| Tennessee resident, Kentucky ticket | $10,402 | $0 | $205,484 |
| Kentucky resident, Ohio ticket | $2,847 | $7,653 | $205,386 |
| Kentucky resident, Tennessee ticket | $10,500 | $0 | $205,386 |
The Tennessee resident pays Kentucky and has no home return on which to recover it; Tennessee lottery tax looks at that border from the other side. The Kentucky resident with a Tennessee ticket pays only Kentucky, because Tennessee taxes no one.
Schedule ITC and the paperwork it demands
When a Kentucky resident's prize is taxed by another state, the credit goes through the Credit for Taxes Paid to Other State Worksheet A and onto Schedule ITC, Section A. It is limited to the lesser of the other state's tax on income Kentucky also taxes, or the Kentucky tax that income generated. Two conditions matter for winners. Tax that was only withheld does not qualify: the other state's return has to be filed and a copy enclosed. And the credit can shrink, or disappear, when gambling losses are deducted on Schedule A against the same winnings.
Losses for those who itemize
Kentucky lets itemizers deduct gambling losses on its Schedule A, up to the winnings reported on the federal return. A resident who won $15,000 in 2026, lost $12,000 and has $14,000 of other itemized deductions sees $10,800 of the losses allowed under the federal limit of 90 % and owes $147 of Kentucky tax on the gambling, according to the calculator below. Whether Kentucky follows the new federal 90 % limit was not confirmed in the materials read; the calculator assumes it does. The new federal loss limit explains the change.
Kentucky resident: gambling winnings and losses in 2026
Tax on the 2026 gambling result
$1,533
| Losses deductible in 2026 (90 %, up to winnings) | $10,800 |
| Losses that no longer count | $1,200 |
| Itemizing beats the standard deduction | yes |
| Federal tax on the gambling | $1,386 |
Many Kentucky cities and counties levy occupational license taxes, but those apply to wages and business profits; no official statement on lottery winnings was found for them. These figures are estimates on 2026 rules, not tax advice. Anyone who wants to talk about their gambling can call 1-800-MY-RESET, the National Problem Gambling Helpline (NCPG).