CA Lotto: What Is the Tax on Lotto Winnings in California?

Seeing those winning lotto numbers on your lottery ticket is always exciting. California offers a number of options for both traditional lottery and daily draw games. You may worry about the California lottery tax, but surprisingly, there are advantages to playing the lottery in California over most other states.

The state of California does not actually tax lottery winnings. This is good news if you hit those lotto-winning numbers. This means that if you're a resident of California and you win a lottery amount over ​$600​, you won't have to pay any state taxes on that win. If you're a resident of another state, and you buy a lottery ticket in California that happens to win, you'll still have to pay taxes to your state of residency; this gives California natives a bit of an advantage in the lottery game!

California reports the gambling income to the IRS for prizes over ​$600​, which will then be subject to federal tax withholding at federal rates. While the IRS withholding starts at winnings over ​$5,000​, because of California's law, taxes will need to be paid on wins above $600. This means that wins between $600 and $5,000 won't necessarily have anything withheld, but they will show up on your taxes as income, which you will have to pay for when you file taxes for that year. Winnings will be automatically withheld on amounts above $5,000.

​Consider Also:​ Can I Claim Lottery Scratch-Offs on My Taxes?

The only other state that does something similar is Delaware; Delaware taxes lottery winnings at normal state rates but doesn't ​withhold​ them. This means that the individual receives the full winnings but still has to pay at tax time. States that don't have an individual income tax, like Texas, Florida and Tennessee, also won't withhold anything for state taxes.

Lottery winners in states that do withhold taxes come home with a portion of their winnings and won't get to see any additional payout until they do their taxes so that the state and federal government know how much to keep and how much to refund.

Even though you don't have to pay state taxes on lottery wins in California, you will still have money withheld for your federal taxes. The IRS offers form W-2G, which lets you report income from gambling enterprises. The standard amount withheld by the IRS on lottery winnings is ​25 percent​. This 25 percent withholding is for citizens and residents with a Social Security number; For citizens and residents without an SSN, this becomes ​28 percent​, whereas noncitizens will have ​30 percent​ withheld.

The trick with lottery winnings is that larger wins count as income that can put your household in a higher tax bracket. So, while the IRS will withhold the standard 25 percent, you can end up owing ​37 percent​ in taxes (future tax rates may change) if your income shoots into the range of the highest bracket. There may not be much effect on your household income if you win $1,000, but a win of $100,000 can easily change your tax bracket so that you owe more than what was withheld.

​Consider Also:​ How to File a Tax Return on Lottery Winnings

California offers two options for major lottery wins. The winner can take either a lump-sum payment, which will be less than the stated jackpot, or an annuity that pays out a set amount over ​30 years,​ which will eventually deliver the entire jackpot. This is because the 30-year plan allows the state to invest winnings and collect interest on them in order to pay out over time.

An immediate cash-out payment is the worth of the money on the day of the win, rather than in 30 years. If you want to know which option is best for your money, California offers an annuity tax calculator.