Lottery Tax Planning
Powerball is over $500 million.
Here are a few lottery tax tips:
Lottery winnings are generally taxable.
However, California does not tax California lottery winnings. There is no official guidance on whether Powerball ticket sold by a California lottery retailer is treated as a California lottery winning since this is a multistate drawing. However, it would be hard for California to argue it’s not a CA lottery winning since it’s sold through the CA lottery.
If you’re lucky enough to win, why worry about taxes as your family is set for generations. For California residents who want to minimize their taxes, make sure your PowerBall ticket is sold by a California lottery retailer. California does not tax California lottery winnings. However, 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 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.