What Is the Tax on Lotto Winnings in California?

Lotto winners in the Golden State are on the hook for federal taxes.

Lotto winners in the Golden State are on the hook for federal taxes.

Surprise! Despite having some of the highest taxes in the country, California does not tax lottery winnings. It’s one of a small handful of states that don’t. The winner has to be a California state resident to qualify for this exception. If you're not a California state resident but bought your winning ticket while vacationing in California, you’ll be subject to your home state’s tax laws.

No California Tax on Winnings

The California Lottery will still withhold 24 percent of your winnings to pay federal taxes if you’re a U.S. citizen or resident alien, and 30 percent if you’re not. The California lottery taxes Scratcher winnings the same way if they're $600 or more. The store where you bought the Scratcher is not required to report winnings to the IRS of less than $600. However, all lottery winnings are considered income and should be reported to the IRS as “other income” on Form 1099 MISC, Miscellaneous Income.

The California Lottery will mail you an IRS Form W-2G, Certain Gambling Winnings, by Jan. 31, the year after you won the lottery. This form shows the amount of your winnings like a W-2 shows the amount of your earnings. Also like a W-2, you submit the W-2G to the IRS with your tax return. You should also keep a copy for your records.

Winnings Calculators Online

You can find a “taxes on lottery winnings calculator” and Powerball payout calculator online. These calculators will give you an idea of what the taxes on your jackpot will be. You just fill in the state where you bought the ticket and the amount of your winnings. It’s best to use these tools as estimators only. For starters, they don’t factor in whether or not you’re a U.S. citizen or resident alien which can affect the result. Neither do they account for what you made at the job you quit after you won the lottery.

California Lottery Tax Calculator

A California lottery tax calculator is available on the lottery’s website for Jackpot Captains. Jackpot Captain is the California Lottery’s name for people who organize their co-workers or families to pool their money to buy larger lots of tickets than each individual could buy on their own. To become a Jackpot Captain, you first have to be a registered player. To become a registered player, you just need to fill out a short form on the California Lottery’s website. Both registered players and Jackpot Captains have to have valid California addresses.

The California lottery tax calculator will tell you the total amount of money that will be withheld from your group’s total winnings. It may also help you estimate the amount of taxes that will be paid by each individual.

Note that the California Lottery will make individual payments to members of groups that are 100 people or less. Members of a group must pick the same payment option a one-time cash payout or installments. Jackpots are set up to be paid in 30 installments by default. If you want the one-time cash value payout, you have to ask for it within 60 days of submitting your winning ticket.

Total Taxes Owed

What you ultimately pay in federal tax for the year you won the lottery will probably be higher than the 24 or 30 percent that the California lottery withholds. The total tax you’ll owe will be based on the amount of your winnings, your individual financial situation and any changes in federal tax rates. So be sure to consult a professional tax adviser who can help you determine your total tax liability.

State Taxes on Earnings

Assuming you’re not going to keep your newfound wealth under the mattress, the interest that it earns after you deposit it in a bank or credit union is considered income. As such, it’s taxed by the IRS and the state of California. The same goes if you invest your jackpot. The interest earned or dividends paid on invested funds are also subject to federal and state taxes.

The California Lottery Winner’s Handbook and good sense decree that you get good financial planning advice early. Savvy financial planning can help lower the taxes you’ll have to pay. Be sure to interview and research any financial adviser before handing over your money. The bank or credit union you currently use can be a good place to start in finding reputable help.

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About the Author

LeDona Withaar has over 20 years’ experience as a securities industry professional and financial manager. She has owned and operated her own business and done volunteer work in corporate development for non-profit organizations such as the Boston Symphony Orchestra. LeDona has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She is currently a teacher and horse rancher.

Photo Credits

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