Lottery Tax Tips

Mega Millions and Powerball jackpot is over a $1 billion.

Some people say the lottery is a tax on fools.

People do win. In my first job, I had a lottery winner in San Francisco who won $24 million.

If you’re a big winner, here are a few lottery tax tips:

Lottery winnings are taxable. The maximum federal tax rate is 37%.

However, California does not tax California lottery winnings.

For California residents who want to minimize their taxes, make sure your Megamillions or Powerball ticket is sold by a California lottery retailer. If you buy your multi-state lottery ticket in another state, those winnings will be taxed to California. Winning the jackpot from a ticket purchased outside California would then subject you to the maximum 13.3% California tax.

For prizes up to about $15 million, there will be tax savings if the 30 year payment option is selected. Having your payments spread over 30 years likely will have some of your payments taxed at lower tax brackets instead of a majority being taxed at the 37% maximum tax rate.

If the 30 year annuity payment option is selected and you then sell your annuity stream to a third party, don’t expect capital gains treatment as this would be subject to the ordinary income tax rates.

The IRS will require withholding tax which could be lower than the actual tax due on the income. So don’t spend it all at once.

Gifts from lottery winnings may trigger a gift tax filing requirement for the person making the gift.

And yes, I do accept gifts from lottery winners.