California lottery winnings are not taxed by California, but the federal government treats every dollar as ordinary income and taxes it at rates up to 37%. The California Lottery withholds 24% for the IRS before you ever see the money, and on a large prize you will owe the difference between that withholding and your top federal bracket when you file. That gap is where most winners get caught.
What California Takes: Nothing
California is one of the few states that completely exempts its own lottery prizes from state income tax. Government Code Section 8880.68 prohibits any state or local tax on lottery ticket sales, prizes awarded by the lottery, and amounts received through prize assignments.1California Legislative Information. California Government Code 8880.68 The exemption covers every California Lottery game: Scratchers, SuperLotto Plus, Daily games, and the multi-state drawings like Powerball and Mega Millions sold through the California Lottery system.
There is one wrinkle. If you win a noncash prize such as a car or property, the item itself is not subject to state income tax, but it may still be subject to property tax and licensing fees.1California Legislative Information. California Government Code 8880.68
The Exemption Does Not Cover Other Gambling
Casino winnings, horse racing payouts, sports bets, raffles, and poker tournament earnings are all taxable income under California law.2Franchise Tax Board. Gambling Personal Income Types They flow through your federal adjusted gross income onto your California return and are taxed at the state’s regular rates, which reach 13.3% at the top.
The same logic applies if you are a California resident who buys a winning ticket in another state. That prize was not awarded by the California Lottery, so it is taxable income for California purposes. The other state may also withhold its own taxes, though California generally allows a credit for taxes paid to another state on the same income.
What the IRS Withholds and What You Actually Owe
Federal law does not care which state sold the ticket. Lottery winnings are ordinary taxable income, reported the same way wages or business income would be.
The 24% Withholding Is Just a Deposit
For lottery prizes exceeding $5,000, the California Lottery must withhold federal income tax before paying you, at a rate of 24%.3Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source On a $10 million lump-sum payout, that is $2.4 million taken out immediately.4Internal Revenue Service. Instructions for Forms W-2G and 5754 (01/2026)
That 24% is not your final tax bill. It is a prepayment toward what you actually owe.
Your Real Rate Is Almost Certainly 37%
Any lottery prize large enough to make the news will push you into the top federal bracket. For 2026, single filers pay 37% on taxable income above $640,601, and married couples filing jointly hit that rate above $768,701. The gap between the 24% withheld and the 37% owed on the top portion of the prize means a very large check to the IRS at tax time.
Here is how winners get into trouble. If you win $50 million and take a $25 million lump sum, roughly $6 million is withheld automatically, but your actual federal tax bill will be closer to $9 million. The remaining $3 million is due when you file. Winners who spend freely in the months after a win and fail to set aside enough for the shortfall can face underpayment penalties and interest on top of the balance.
Non-U.S. Citizens Pay 30% Flat
Non-resident aliens who win a California lottery prize face 30% federal withholding on the full amount, not 24%. It is a flat tax with no deductions against it. If the winner’s home country has a tax treaty with the United States, the rate may be reduced, but claiming that benefit requires filing a Form W-8BEN with a valid taxpayer identification number before the payout.
Lump Sum vs. Annuity Changes the Tax Picture
Every major jackpot offers two payout choices, and the tax consequences differ sharply.
Lump Sum
The lump sum is the cash value of the prize pool at the time of the drawing, which is significantly less than the advertised jackpot. You receive one payment, and the full amount lands in a single tax year. That concentrates nearly all the income at the top marginal rate. The upside is immediate access to the after-tax amount and the ability to invest it on your own terms.
Annuity
The Mega Millions annuity pays out as one immediate installment followed by 29 annual payments, each 5% larger than the previous one to help offset inflation.5Mega Millions. Difference Between Cash Value and Annuity You pay tax only on what you receive each year. For a smaller jackpot, spreading the income can keep some years in a lower bracket. For a billion-dollar prize, even the annual installments are large enough to hit the top rate anyway.
The annuity also carries a risk winners often overlook. You lock in today’s payout structure while future federal tax rates remain unknown. If rates rise over the next 30 years, later payments get taxed more heavily than planned. The lump sum settles the tax question at known rates in a single year.
Giving Money Away Does Not Shift the Tax
Winners often want to share with family, and that is where the gift tax rules come in.
You can give up to $19,000 per recipient in 2026 without any gift tax consequence or reporting requirement.6Internal Revenue Service. Frequently Asked Questions on Gift Taxes A married couple combining their exclusions can give $38,000 per person. Across ten family members, that is $380,000 a year distributed gift-tax-free.
Gifts above the annual exclusion count against your lifetime exemption, which is $15,000,000 for 2026 following the increase enacted by the One, Big, Beautiful Bill Act.7Internal Revenue Service. What’s New – Estate and Gift Tax You do not actually owe gift tax until your cumulative lifetime gifts above the annual exclusion exceed that threshold, but you must file Form 709 for any year in which you give a single person more than $19,000.
One trap trips people up constantly: the winner owes income tax on the full prize no matter how much they give away. Handing your brother $5 million does not shift the income tax to him. You pay federal income tax on the entire prize first, then make the gift from what is left.
Splitting a Prize With a Group
Office pools and family syndicates are common, but the IRS needs to know who actually won. When a group shares a prize, the person who claims it fills out IRS Form 5754, identifying every member and their share.8Internal Revenue Service. About Form 5754, Statement by Person(s) Receiving Gambling Winnings The lottery then issues a separate Form W-2G to each participant for their portion.
Without Form 5754, the full prize is reported under one person’s Social Security number. That person gets the entire tax bill and must later argue the money was shared, which creates gift tax complications and audit risk. If you run an office pool, keep a written agreement signed by every participant before the drawing. It costs nothing and prevents disputes that turn ugly when millions are on the table.
Filing After a Win
The California Lottery issues Form W-2G to every winner whose prize triggers federal reporting. The form shows the gross winnings and the federal tax already withheld.9Internal Revenue Service. About Form W-2G, Certain Gambling Winnings You will use it to complete your federal return and claim credit for the withheld amount.
You still file a California return. Your lottery income appears on your federal return, and you use Schedule CA to subtract it from California taxable income. The state return itself is not optional just because the prize is state-tax-exempt; your other California-source income still has to be reported.
The single most useful thing a winner can do is hire a tax professional before claiming the prize, not after spending it. The gap between 24% withheld and 37% owed catches people off guard every time, and the planning options, including charitable trusts, timing strategies, and estimated payment schedules, shrink quickly once the money has been distributed.