There is no state tax on lottery winnings in California. Under California Government Code Section 8880.68, the state and every local government are barred from taxing California Lottery prizes, including Powerball and Mega Millions tickets sold in California.1California Legislative Information. California Government Code 8880.68 Federal tax is another story. The lottery withholds 24% of any prize over $5,000 before you see the money, and a large jackpot will push most of the prize into the 37% top federal bracket, leaving a sizable bill at filing time.
No California State Tax on Lottery Prizes
The exemption is blanket. It covers ticket sales, the prize itself, and any amount received through an assignment of future payments.1California Legislative Information. California Government Code 8880.68 Every game the California Lottery offers qualifies, including SuperLotto Plus, Powerball, and Mega Millions.2Franchise Tax Board. Gambling Personal Income Types A resident who buys a Powerball ticket at a gas station in Fresno and hits a billion-dollar jackpot owes Sacramento nothing.
Nonresidents get the same treatment. The prohibition attaches to the prize, not to where the winner lives, so an out-of-state visitor who wins a California Lottery prize pays no California tax on it either.
Two boundaries matter. First, the exemption applies only to the California State Lottery. Winnings from casinos, card rooms, horse racing, sports betting, and raffles are ordinary income on your California return, taxed on a progressive scale that tops out at 13.3%.2Franchise Tax Board. Gambling Personal Income Types Second, if you’re a California resident and you buy a lottery ticket in Nevada or New York, that prize is not a California Lottery prize and does not qualify for the exemption. You’d report it on your California return like any other income.
How Much Federal Tax You’ll Owe
The IRS treats lottery winnings as ordinary income at your marginal rate.3Internal Revenue Service. Gambling Income and Losses For any prize over $5,000, 24% is withheld before payout.4eCFR. 26 CFR 31.3402(q)-1 – Extension of Withholding to Certain Gambling Winnings Treat that 24% as a deposit against the eventual bill, not the bill itself.
For 2026, the 37% top federal rate applies to taxable income above $640,600 for single filers and $768,700 for married couples filing jointly.5Internal Revenue Service. Rev. Proc. 2025-32 Any jackpot in the millions clears those thresholds many times over, so most of the prize is taxed at 37%. The 13-point gap between what was withheld and what’s owed compounds fast. On a $10 million lump sum, that gap alone can exceed $1 million.
The federal system is progressive, so the first slices of income are taxed at 10%, 12%, and 22% before reaching the top bracket. On a multi-million-dollar prize, though, those lower brackets are a rounding error. The effective federal rate on a large jackpot ends up close to 37%.
Lump Sum or Annuity
California Lottery jackpots default to 30 graduated annual installments. Winners have 60 days after their claim is approved to elect a lump-sum cash payout instead, using a notarized Jackpot Election Payment Form.6California State Lottery. Winner’s Handbook Everyone in a group must choose the same option, or the prize defaults to annuity.
The lump sum is always smaller than the advertised jackpot, because the headline number assumes the lottery invests the cash value over 30 years. The whole cash payout is taxable in the year received, which almost guarantees the top bracket applies to most of it.
An annuity spreads the income across 30 payments that grow by about 5% each year. Spreading the income can keep portions of each year’s payment in lower brackets and reduce the total federal tax paid over the life of the prize. The tradeoff is flexibility: you can’t invest the full amount yourself, and you’re locked into the lottery’s schedule. A lump sum invested well can outperform the annuity after taxes, but that depends on returns and discipline, and there’s no universally right answer.
If an annuity winner dies before the payments are complete, the remaining installments pass to the estate or named beneficiaries on the same schedule, and the present value of what’s left is included in the estate for federal estate tax. For 2026, the federal estate tax exclusion is $15 million per individual, so only very large remaining balances would trigger estate tax.7Internal Revenue Service. What’s New – Estate and Gift Tax
Splitting a Prize With a Group
Office pools and family syndicates need to handle the paperwork correctly, or the person who claims the prize can end up taxed on the whole thing. The claimant fills out Form 5754, listing each winner’s name, address, taxpayer identification number, and share.8Internal Revenue Service. Form 5754 – Statement by Person(s) Receiving Gambling Winnings The lottery then issues each person a separate Form W-2G for their portion.
Skip that step and the IRS can treat the money you hand out to coworkers as taxable gifts rather than shared winnings. The 2026 annual gift tax exclusion is $19,000 per recipient; anything above that counts against your lifetime exclusion and may require a gift tax return.9Internal Revenue Service. Gifts and Inheritances A written pool agreement signed before the drawing, spelling out contributors and shares, avoids the problem.
Deducting Gambling Losses
You can offset gambling winnings with gambling losses, but only if you itemize. Starting with tax years beginning after December 31, 2025, a new cap allows deduction of only 90% of losses, down from 100% under prior rules, and the cap also covers wagering-related expenses.10Office of the Law Revision Counsel. 26 USC 165 – Losses The change was enacted through the One, Big, Beautiful Bill Act signed on July 4, 2025.
Losses can never exceed winnings. Win $50,000 and lose $20,000 the same year, and you can deduct up to $18,000, still owing tax on $32,000. The IRS expects a diary with the date, type, location, and amount of each wager, plus receipts, tickets, or bank statements to back it up.11Internal Revenue Service. Diary or Similar Record
Filing and Estimated Payments
The lottery sends Form W-2G showing the gross prize and any federal withholding, with a copy to the IRS.12Internal Revenue Service. About Form W-2G, Certain Gambling Winnings You report the winnings on Schedule 1 of Form 1040.3Internal Revenue Service. Gambling Income and Losses Match every figure against your own records before filing; mismatches are a reliable audit trigger.
Because 24% withholding rarely covers the full bill on a large prize, you’ll likely need estimated tax payments to avoid an underpayment penalty.13Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax Payments are due April 15, June 15, September 15, and January 15 of the following year.14Internal Revenue Service. Estimated Tax IRS Direct Pay sends payments from a bank account for free.15Internal Revenue Service. Direct Pay with Bank Account
One safe harbor is worth knowing. If your prior-year adjusted gross income was over $150,000, paying at least 110% of last year’s total tax through withholding and estimated payments protects you from underpayment penalties no matter how much you actually owe. For a first-time big winner, the prior year’s tax was probably tiny, which makes the year of the win the hard one to plan. Working out the estimates with a tax professional beats guessing; the penalty for getting it wrong can run into thousands.