Winnings from the California State Lottery are not subject to California state tax on lottery winnings, but the IRS still takes a substantial cut. The Franchise Tax Board excludes California Lottery prizes, including SuperLotto Plus, Powerball, and Mega Millions, from state taxable income when the ticket was bought from a licensed California retailer.1State of California Franchise Tax Board. Gambling – Personal Income Types Federal tax applies in full, and 24 percent of any prize over $5,000 is withheld before you see the money.2Internal Revenue Service. Instructions for Forms W-2G and 5754
What the California Exemption Covers
The exemption is narrow and specific. It applies to prizes paid by the California State Lottery on tickets purchased from a licensed California retailer. A Mega Millions ticket bought at a Sacramento gas station qualifies. The same game purchased in Portland does not.
The financial value is real. California’s income tax tops out at 12.3 percent, and a 1 percent Behavioral Health Services Tax surcharge hits income over $1 million.3Franchise Tax Board. 2025 California Tax Rate Schedules On a $10 million jackpot, the exemption saves roughly $1.3 million against what you’d owe if the prize were taxed as ordinary state income.
Nonresidents get the same treatment. If you live in another state and buy a winning California Lottery ticket while visiting, the FTB will not tax the prize. Your home state may impose its own tax on the winnings, but California takes nothing.
What California Still Taxes
Every form of gambling income other than the California State Lottery is fair game. California residents owe state tax on worldwide income, which includes winnings from out-of-state lotteries, tribal casinos, card rooms, sports betting, horse racing, and private poker games.4State of California Franchise Tax Board. Part-Year Resident and Nonresident
Multi-state games cause the most confusion. A Powerball ticket bought in Nevada is fully taxable to a California resident, even though the identical game bought at a California retailer would be exempt. Charitable sweepstakes, international raffles, and casino jackpots follow the same rule. If the payer is not the California State Lottery, the winnings sit in California taxable income at your marginal rate.
The FTB receives copies of Form W-2G from payers, so leaving these winnings off a return tends to surface during processing, with penalties and interest attached.
Federal Tax on Your Winnings
The IRS treats lottery prizes as ordinary income, taxed at the same rates as wages.5Internal Revenue Service. Topic No. 419, Gambling Income and Losses For any prize above $5,000, the lottery withholds 24 percent and sends it to the IRS before writing your check.2Internal Revenue Service. Instructions for Forms W-2G and 5754
That withholding is almost never enough on a large prize. For 2026, the top federal rate is 37 percent on income above $640,600 for single filers.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A big jackpot pushes nearly everything into the top bracket, opening a 13-point gap between what was withheld and what you actually owe. On a $5 million lump-sum payout, that gap works out to roughly $650,000 due at filing.
Estimated Payments and the Underpayment Penalty
The IRS expects tax to be paid as income is earned, not all at April. If your withholding covers less than 90 percent of your total tax for the year, or 100 percent of the prior year’s tax (110 percent if your prior-year AGI was over $150,000), an underpayment penalty applies.7Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
The 24 percent withholding usually falls short of those safe harbors. The practical response is an estimated payment on Form 1040-ES shortly after the prize is received. A rough working figure is setting aside at least 40 percent of the gross prize for federal tax, with a professional calculating the exact number.
Lump Sum or Annuity
Most large prizes offer a choice between annual payments over 25 to 30 years and a smaller lump sum, typically 50 to 60 percent of the advertised jackpot. The tax consequences differ.
Take the lump sum and the entire amount hits one tax year, pushing virtually all of it into the top federal bracket. Take the annuity and each year’s installment is taxed on its own. On very large jackpots the difference tends to be modest, because each annual payment still lands in the top bracket, but on mid-size prizes the annuity can keep some payments in lower brackets.
Under IRC Section 451(j), if the lottery presents the lump-sum-or-annuity choice within 60 days of the win, you’re taxed only on what you actually receive each year under the annuity, and the constructive receipt doctrine doesn’t apply.8Office of the Law Revision Counsel. 26 U.S. Code 451 – General Rule for Taxable Year of Inclusion If the buyout option arrives later than 60 days after winning, tax treatment gets murkier and professional advice matters.
Splitting a Ticket vs. Gifting Later
Office pools and family arrangements are common, and how you handle them changes the tax outcome. When several people share a winning ticket, whoever claims the prize files IRS Form 5754 identifying every participant and their share.9Internal Revenue Service. About Form 5754, Statement by Person(s) Receiving Gambling Winnings The lottery then issues a separate W-2G to each person. Skip that form and the IRS treats the entire prize as belonging to whoever claimed it, leaving that person with the full tax bill.
Gifting winnings after the fact is a different problem. If you win and then share with family or friends, the IRS treats each transfer as a gift. For 2026, the annual gift tax exclusion is $19,000 per recipient.10Internal Revenue Service. What’s New – Estate and Gift Tax Anything above that counts against your lifetime estate and gift tax exemption and requires a gift tax return. Handing a sibling $500,000 uses $481,000 of that lifetime exemption. Documenting a pool in writing before the drawing splits the income at the source; sharing afterward stacks a gift tax problem on top of the income tax.
Filing the California Return
California Lottery winnings still appear on your federal return, and federal adjusted gross income is the starting point for your state return. To claim the exemption, subtract the lottery amount on Schedule CA (540), line 8b, column B.11Franchise Tax Board. 2025 Instructions for Schedule CA (540) California Adjustments That adjustment removes the winnings from California taxable income while your federal figures stay unchanged.
Keep the original ticket, the claim receipt from the California Lottery, and your copy of Form W-2G. These documents show the prize came from the California State Lottery and support the Schedule CA subtraction if the FTB questions it. The W-2G identifies the payer as the California Lottery, which is the detail that separates exempt lottery income from taxable gambling income.
For out-of-state or non-lottery gambling winnings, make no adjustment on Schedule CA. Those amounts remain in California taxable income at your marginal rate.1State of California Franchise Tax Board. Gambling – Personal Income Types If another state withheld tax on out-of-state winnings, California offers a credit for taxes paid to other states on Schedule S to prevent double taxation.
Offsetting With Gambling Losses
Regular gamblers who also happen to win the lottery can offset some gambling income with documented losses. Starting in 2026, federal law allows a deduction of 90 percent of gambling losses against gambling winnings, down from 100 percent.12Internal Revenue Service. Internal Revenue Bulletin 2026-19 You can never deduct more than you won, and you have to itemize on Schedule A to claim anything.5Internal Revenue Service. Topic No. 419, Gambling Income and Losses
The IRS requires a diary or log of gambling activity along with receipts, tickets, and statements showing specific amounts. Vague estimates don’t survive an audit, and casual gamblers who win big often find they can’t reconstruct records after the fact.
On the California side, the Schedule CA adjustment cuts the other way too. If you subtracted California Lottery winnings from state income, you must also reduce any gambling loss deduction by the amount tied to lottery play.11Franchise Tax Board. 2025 Instructions for Schedule CA (540) California Adjustments California will not let you deduct losses linked to income it never taxed.