How Much Taxes Do You Pay On Casino Winnings In California

• How Much Taxes Do You Pay On Casino Winnings In California Lottery
• How Much Taxes Do You Pay On Casino Winnings In California State
• How Much Taxes Do You Pay On Casino Winnings In California Now
• How Much Taxes Do You Pay On Casino Winnings In California Today

The law does allow players to take gambling losses off their taxes, but only up to the amounts of their winnings. Of course, if you win, say $135,000, you can take off all gambling losses, up to that amount. If you gambled away, say $65,000, you would only have to pay taxes on the remaining, let's see: $135,000 minus $65,000 equals $70,000.

• Gambling losses — You can deduct your gambling losses (like the cost of lottery tickets that you didn't win on) as long as they don't exceed the winnings you report as income. For example, if you report $1,000 in winnings but you have $2,000 in losses, you can only deduct $1,000.
• If gambling winnings exceed certain thresholds based on the type of the taxpayer's gambling and the amount won, then the casino, poker palace or racetrack is required to send the taxpayer and the IRS a Form W-2G that shows the winnings, so you can be sure the IRS will be aware of their gambling income.

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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.

Hit it big playing the lottery? You're probably thinking about how you'll spend all that sweet cash. But first, Uncle Sam is going to want his cut.

The Internal Revenue Service considers lottery money as gambling winnings, which are taxed as ordinary income. The total amount of tax you pay on your lottery winnings will depend on multiple factors, including the state where you live and whether you take the winnings as a lump-sum payment (one check for the full amount after taxes have been withheld) or an annuity (smaller annual payments that are paid out and taxed over time).

Although you probably won't be able to completely escape the tax man, you may be able to offset taxes on lottery winnings by claiming deductions you qualify for. Here are some things to know about paying federal income taxes on lottery winnings. Keep in mind tax rules may vary for state and local income taxes, so for the purposes of this article, we're talking about federal income taxes only.

Do I have to pay taxes on lottery winnings?

The IRS considers most types of income taxable, unless the tax code specifically says it's not. Because lottery winnings are considered gambling winnings, which are definitely considered taxable income, the IRS will want its cut.

For lottery winnings, that means one of two things.

• You'll either pay taxes on all the winnings in the year you receive the money — for winnings paid out as a lump-sum payment.
• Or you'll pay taxes only on the amount you receive each year — for winnings paid as an annuity.

Take note: If you receive interest on annuity installments that haven't been paid to you yet, that interest must be included in your gross income for the tax year you received it.

How will the IRS know about my lottery winnings?

If your winnings are $600 or more, the lottery agency is supposed to give you a Form W-2G that you'll have to file with your federal income tax return if the agency withheld federal income tax from your winnings.

The lottery agency is also required to send a copy of this form to the IRS if your winnings are $600 or more, so it's important to accurately report your winnings on your federal tax return.

And even if you don't receive a W-2G for your lottery winnings (or other type of gambling payouts), you're still expected to report those winnings as income on your federal tax return.

How could winning the lottery affect my taxes overall?

Getting a huge financial windfall can be life-changing, but it doesn't change everything — you'll still have to pay taxes and bills. Federal and state taxes can decrease the amount of money you ultimately receive, so it's crucial to understand taxes on lottery winnings when you strike it big.

Whether you're all-in on your prize money and accept it as a lump sum or you're receiving payments over time, winning the lottery generally increases your income. Taxes are calculated based on your taxable income for the year, so if the extra income from lottery winnings moves you into a higher tax bracket, you'll typically end up paying more income tax.

If you fail to report taxable income (including lottery winnings) on your tax return, you could owe additional tax, interest and even penalties.

What is the tax rate for lottery winnings?

Depending on where you live, you may need to pay taxes on lottery winnings to your state and local governments in addition to the federal government.

Federal tax

Right off the bat, lottery agencies are required to withhold 24% from winnings of $5,000 or more, which goes to the federal government. But, depending on whether your winnings affect your tax bracket, there could potentially be a gap between the mandatory withholding amount and what you'll ultimately owe the IRS.

Even if your lottery winnings don't boost your tax bracket, if the federal government withheld too much tax on your lottery winnings, you might get a refund at tax time.

State and local tax

Each state has its own rules on taxing lottery winnings, so check both your state's tax website and your city's tax website for information. For example, if you live and win in New York City, the state government will withhold 8.82% and the city will withhold another 3.876% — on top of your base federal withholding of 24%.

Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — don't have income tax, so big winners in those states won't pay state taxes on prize money. Some other states don't have a state lottery at all.

How Much Taxes Do You Pay On Casino Winnings In California Lottery

And three more states — California, New Hampshire and Tennessee — exclude their state lottery winnings from taxable income. But before you play the lottery in a different state, check the rules so that you know whether any taxes will apply to your winnings.

Should I take a lump sum or annuity payments?

Whether you get to choose between a lump sum or annual installments for your lottery payout can depend on different factors, like state lottery rules and how much you won. Either way, here's how the two payout types will affect your federal income taxes.

Lump-sum impact

Receiving your winnings as a single lump sum could potentially bump you right into the highest bracket for the tax year in which you win the lottery. That would mean if you win a very large amount, your income over a set threshold ($518,401 for single taxpayers and $622,051 for married couples filing jointly, for 2020) would be taxed by the IRS at 37%.

'If you decide to have a lump sum payment, that would probably put you in the higher tax bracket for that one year,' says Megan McManus, CPA and owner at Megan McManus, CPA.

For example, if you're single and your current taxable income is $40,000, a $1 million lottery payout, taken in a lump sum, would increase your total income to $1,040,000 for the tax year. At the federal level, the portion of your income over $518,401 would be taxed at 37%. But all the lower tax rates would also apply to portions of your income less than that threshold. Here's what you'd pay (rounded to the nearest dollar).

• 10% on income up to $9,700 = $970
• 12% on the next $29,775 = $3,573
• 22% on the next $44,725 = $9,839
• 24% on the next $76,525 = $18,366
• 32% on the next $43,375 = $13,880
• 35% on the next $306,200 = $107,170
• 37% on the last $529,700 = $195,989

If you add all that up, your total federal income tax obligation for the year would be $349,787.

Annual payments impact

Depending on your income, receiving annual payments will also likely affect your tax bracket — but the immediate financial impact could be less.

'The annuity payments would probably allow you to be in a lower tax bracket each year,' McManus says.

Let's look at the above scenario with the same amount of lottery winnings broken out into 30 annual payments of about $33,333.

With the annuity approach, your taxable income would increase to just $73,333 in the year you won the lottery (assuming other factors like a wage increase didn't boost your taxable income). The highest federal tax rate that would apply to your income would be just 22%. Here's what you'd pay (rounded to the nearest dollar).

• 10% on up to $9,700 = $970
• 12% on the next $29,775 = $3,573
• 22% on the remaining $33,858 = $7,449

Your total federal income tax obligation for the year in which you win would be just $11,992.

Learn more about the marginal tax rate and what it means for your winnings.

How can I offset federal taxes on lottery winnings?

If you've won the lottery, the IRS expects you to report it as income on your tax return. And Uncle Sam is going to want his share whether you receive your winnings as a lump sum or annual payments. But there are ways to try to offset the increased tax obligation your lottery winnings will cause.

Claim deductions

Deductions are dollar amounts the IRS allows you to subtract from your adjusted gross income, or AGI, if you meet the requirements. This lowers your taxable income, which in turn can reduce your tax obligation. Here are two possible deductions (if you itemize).

1. Charitable donations — You may be able to deduct the value of your charitable contributions from your income as long as the organization is a qualified tax-exempt organization — but certain conditions and limits apply. For example, you can only deduct cash donations that are equal to no more than 60% of your AGI.
2. Gambling losses — You can deduct your gambling losses (like the cost of lottery tickets that you didn't win on) as long as they don't exceed the winnings you report as income. For example, if you report $1,000 in winnings but you have $2,000 in losses, you can only deduct $1,000.

Play the lottery in a pool

If you join a pool with others to buy lottery tickets, then any potential lottery prizes will be smaller because you're sharing it — but your tax hit will be smaller, too.

'You'll only be taxed on your portion of the income,' McManus says, 'so if you receive a third of the winnings, you would only pay tax on that third.'

To make sure you're taxed correctly, document how much of the winnings go to each person in your group. Ask the lottery agency to cut checks for each person in the pool instead of having one person collect and distribute the winnings. This may help ensure you only pay taxes on the amount you actually receive.

What's next

Winning the lottery could change your life by giving you a certain level of financial freedom. But before claiming your prize, consider speaking with a financial or tax adviser who can help you understand the potential tax impact of your winnings and plan the best way to manage your windfall.

Consider how you plan to use the money.

'If you want to buy a house or put your kids through college, you might need the funds now, as opposed to taking annual payments,' McManus says.

But if your objective is to ensure a steady stream of income, annual payments may be more appealing to you.

Whether you receive your lottery winnings as a lump sum or annual payments though, you'll still have to pay the federal government — and possibly your state and local government — their share of your winnings. So it's important to have a plan for how to best save, invest and grow the winnings you'll keep.

Relevant sources: Topic No. 419 Gambling Income and Losses | IRS: Publication 538 | New York Lottery General Rules | IRS: Pay As You Go, So You Won't Owe

Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor's degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

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If you win a sweepstakes or contest prize, you will owe income taxes to Uncle Sam and perhaps your state. Prizes are considered taxable income regardless of whether the prize is in the form of cash, trips or merchandise. If you win a prize valued over $600, the sweepstakes or contest sponsor must report the value to you and the Internal Revenue Service on a Form 1099-MISC. You're still supposed to report and pay tax on prizes under $600.

Addition to Income

Prizes and awards will increase your tax bill, but the question of how much depends on the value of the winnings and the amount of your other income. Prizes are taxed as ordinary income. That means you add the prize value to the income you received from your job and other sources during the year. Sometimes, a sponsor will include a cash award to help cover taxes on the prize, but the cash also is taxable income to the winner. The prize value will increase your federal adjusted gross income, which likely will increase your net taxable income after you take your exemptions and deductions. The prize win could push you into a higher tax bracket. Your federal adjusted gross income is the starting point for most state income tax returns so the value of the sweepstakes prize within your federal AGI could increase your state taxable income.

State Taxes

You will have to pay state income tax on your winnings in 39 states. If you live in one of the 11 states that don't tax sweepstakes prizes, you may be spared state income taxes. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income taxes. Additionally, California, Delaware, New Hampshire and Pennsylvania don't tax winnings on sweepstakes or other gambling. But if you live in a non-taxable state and win a sweepstakes based in a taxable state, you may have to file a tax return with the taxable state where the sweepstakes is based. If you are unsure about whether you will owe state tax on your big win, ask your state's tax collection agency.

Tax Withholding

If the sweepstakes prize is worth more than $5,000, the sponsor must withhold 25 percent of the prize value for federal taxes and may have to withhold state taxes as well. But if the prize is a car or other expensive merchandise, you may be required to give the sponsor the cash to pay the federal tax withholding before the sponsor will release the non-cash prize to you. For instance, if you won a $25,000 car, you may have to give the sponsor $6,250 for the federal tax withholding before the sponsor will give you the car. You may also have to pay state withholding up front. The sweepstakes sponsor could choose to pay the federal tax withholding, but if it does, the sponsor's withholding rate is one-third of the prize's fair market value.

How Much Taxes Do You Pay On Casino Winnings In California State

Valuing Prizes

If your prize is a non-cash award such as a trip or a car, you will owe tax on the fair market value of the prize. There is no uniform method for determining fair market value. Neither the U.S. tax code nor U.S. Tax Court rulings have specified the proper way to set the fair market value of a non-cash prize. The sweepstakes or contest promoter will report what it considers to be fair market value. That figure may be different from the 'approximate retail value' the sponsor cited in sweepstakes advertising. But the sponsor's fair market value figure may be subject to dispute. For example, parties could dispute whether the fair market value of an automobile is the manufacturer's suggested retail price or the discounted price the sweepstakes sponsor paid to buy the car.

Exempt Prizes

You can avoid all taxes on a prize if you refuse to accept it. A prize may not be taxable if it meets certain legal tests. To be tax-exempt, the prize must be in recognition of personal achievement in religious, scientific, literary, artistic, charitable, educational or civic affairs. You cannot have nominated yourself for the prize or submitted your own work for review. You can't be required to perform services as a condition for receiving the prize. You cannot claim the prize for yourself but instead must assign the prize to charity. If you assign away the prize, you don't get a charitable donation deduction. All these tests must be met to avoid tax on the prize.

And even if you don't receive a W-2G for your lottery winnings (or other type of gambling payouts), you're still expected to report those winnings as income on your federal tax return.

How could winning the lottery affect my taxes overall?

Getting a huge financial windfall can be life-changing, but it doesn't change everything — you'll still have to pay taxes and bills. Federal and state taxes can decrease the amount of money you ultimately receive, so it's crucial to understand taxes on lottery winnings when you strike it big.

Whether you're all-in on your prize money and accept it as a lump sum or you're receiving payments over time, winning the lottery generally increases your income. Taxes are calculated based on your taxable income for the year, so if the extra income from lottery winnings moves you into a higher tax bracket, you'll typically end up paying more income tax.

If you fail to report taxable income (including lottery winnings) on your tax return, you could owe additional tax, interest and even penalties.

What is the tax rate for lottery winnings?

Depending on where you live, you may need to pay taxes on lottery winnings to your state and local governments in addition to the federal government.

Federal tax

Right off the bat, lottery agencies are required to withhold 24% from winnings of $5,000 or more, which goes to the federal government. But, depending on whether your winnings affect your tax bracket, there could potentially be a gap between the mandatory withholding amount and what you'll ultimately owe the IRS.

Even if your lottery winnings don't boost your tax bracket, if the federal government withheld too much tax on your lottery winnings, you might get a refund at tax time.

State and local tax

Each state has its own rules on taxing lottery winnings, so check both your state's tax website and your city's tax website for information. For example, if you live and win in New York City, the state government will withhold 8.82% and the city will withhold another 3.876% — on top of your base federal withholding of 24%.

Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — don't have income tax, so big winners in those states won't pay state taxes on prize money. Some other states don't have a state lottery at all.

How Much Taxes Do You Pay On Casino Winnings In California Lottery

And three more states — California, New Hampshire and Tennessee — exclude their state lottery winnings from taxable income. But before you play the lottery in a different state, check the rules so that you know whether any taxes will apply to your winnings.

Should I take a lump sum or annuity payments?

Whether you get to choose between a lump sum or annual installments for your lottery payout can depend on different factors, like state lottery rules and how much you won. Either way, here's how the two payout types will affect your federal income taxes.

Lump-sum impact

Receiving your winnings as a single lump sum could potentially bump you right into the highest bracket for the tax year in which you win the lottery. That would mean if you win a very large amount, your income over a set threshold ($518,401 for single taxpayers and $622,051 for married couples filing jointly, for 2020) would be taxed by the IRS at 37%.

'If you decide to have a lump sum payment, that would probably put you in the higher tax bracket for that one year,' says Megan McManus, CPA and owner at Megan McManus, CPA.

For example, if you're single and your current taxable income is $40,000, a $1 million lottery payout, taken in a lump sum, would increase your total income to $1,040,000 for the tax year. At the federal level, the portion of your income over $518,401 would be taxed at 37%. But all the lower tax rates would also apply to portions of your income less than that threshold. Here's what you'd pay (rounded to the nearest dollar).

• 10% on income up to $9,700 = $970
• 12% on the next $29,775 = $3,573
• 22% on the next $44,725 = $9,839
• 24% on the next $76,525 = $18,366
• 32% on the next $43,375 = $13,880
• 35% on the next $306,200 = $107,170
• 37% on the last $529,700 = $195,989

If you add all that up, your total federal income tax obligation for the year would be $349,787.

Annual payments impact

Depending on your income, receiving annual payments will also likely affect your tax bracket — but the immediate financial impact could be less.

'The annuity payments would probably allow you to be in a lower tax bracket each year,' McManus says.

Let's look at the above scenario with the same amount of lottery winnings broken out into 30 annual payments of about $33,333.

With the annuity approach, your taxable income would increase to just $73,333 in the year you won the lottery (assuming other factors like a wage increase didn't boost your taxable income). The highest federal tax rate that would apply to your income would be just 22%. Here's what you'd pay (rounded to the nearest dollar).

• 10% on up to $9,700 = $970
• 12% on the next $29,775 = $3,573
• 22% on the remaining $33,858 = $7,449

Your total federal income tax obligation for the year in which you win would be just $11,992.

Learn more about the marginal tax rate and what it means for your winnings.

How can I offset federal taxes on lottery winnings?

If you've won the lottery, the IRS expects you to report it as income on your tax return. And Uncle Sam is going to want his share whether you receive your winnings as a lump sum or annual payments. But there are ways to try to offset the increased tax obligation your lottery winnings will cause.

Claim deductions

Deductions are dollar amounts the IRS allows you to subtract from your adjusted gross income, or AGI, if you meet the requirements. This lowers your taxable income, which in turn can reduce your tax obligation. Here are two possible deductions (if you itemize).

1. Charitable donations — You may be able to deduct the value of your charitable contributions from your income as long as the organization is a qualified tax-exempt organization — but certain conditions and limits apply. For example, you can only deduct cash donations that are equal to no more than 60% of your AGI.
2. Gambling losses — You can deduct your gambling losses (like the cost of lottery tickets that you didn't win on) as long as they don't exceed the winnings you report as income. For example, if you report $1,000 in winnings but you have $2,000 in losses, you can only deduct $1,000.

Play the lottery in a pool

If you join a pool with others to buy lottery tickets, then any potential lottery prizes will be smaller because you're sharing it — but your tax hit will be smaller, too.

'You'll only be taxed on your portion of the income,' McManus says, 'so if you receive a third of the winnings, you would only pay tax on that third.'

To make sure you're taxed correctly, document how much of the winnings go to each person in your group. Ask the lottery agency to cut checks for each person in the pool instead of having one person collect and distribute the winnings. This may help ensure you only pay taxes on the amount you actually receive.

What's next

Winning the lottery could change your life by giving you a certain level of financial freedom. But before claiming your prize, consider speaking with a financial or tax adviser who can help you understand the potential tax impact of your winnings and plan the best way to manage your windfall.

Consider how you plan to use the money.

'If you want to buy a house or put your kids through college, you might need the funds now, as opposed to taking annual payments,' McManus says.

But if your objective is to ensure a steady stream of income, annual payments may be more appealing to you.

Whether you receive your lottery winnings as a lump sum or annual payments though, you'll still have to pay the federal government — and possibly your state and local government — their share of your winnings. So it's important to have a plan for how to best save, invest and grow the winnings you'll keep.

Relevant sources: Topic No. 419 Gambling Income and Losses | IRS: Publication 538 | New York Lottery General Rules | IRS: Pay As You Go, So You Won't Owe

Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor's degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

Related Articles

More Articles

If you win a sweepstakes or contest prize, you will owe income taxes to Uncle Sam and perhaps your state. Prizes are considered taxable income regardless of whether the prize is in the form of cash, trips or merchandise. If you win a prize valued over $600, the sweepstakes or contest sponsor must report the value to you and the Internal Revenue Service on a Form 1099-MISC. You're still supposed to report and pay tax on prizes under $600.

Addition to Income

Prizes and awards will increase your tax bill, but the question of how much depends on the value of the winnings and the amount of your other income. Prizes are taxed as ordinary income. That means you add the prize value to the income you received from your job and other sources during the year. Sometimes, a sponsor will include a cash award to help cover taxes on the prize, but the cash also is taxable income to the winner. The prize value will increase your federal adjusted gross income, which likely will increase your net taxable income after you take your exemptions and deductions. The prize win could push you into a higher tax bracket. Your federal adjusted gross income is the starting point for most state income tax returns so the value of the sweepstakes prize within your federal AGI could increase your state taxable income.

State Taxes

You will have to pay state income tax on your winnings in 39 states. If you live in one of the 11 states that don't tax sweepstakes prizes, you may be spared state income taxes. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income taxes. Additionally, California, Delaware, New Hampshire and Pennsylvania don't tax winnings on sweepstakes or other gambling. But if you live in a non-taxable state and win a sweepstakes based in a taxable state, you may have to file a tax return with the taxable state where the sweepstakes is based. If you are unsure about whether you will owe state tax on your big win, ask your state's tax collection agency.

Tax Withholding

If the sweepstakes prize is worth more than $5,000, the sponsor must withhold 25 percent of the prize value for federal taxes and may have to withhold state taxes as well. But if the prize is a car or other expensive merchandise, you may be required to give the sponsor the cash to pay the federal tax withholding before the sponsor will release the non-cash prize to you. For instance, if you won a $25,000 car, you may have to give the sponsor $6,250 for the federal tax withholding before the sponsor will give you the car. You may also have to pay state withholding up front. The sweepstakes sponsor could choose to pay the federal tax withholding, but if it does, the sponsor's withholding rate is one-third of the prize's fair market value.

How Much Taxes Do You Pay On Casino Winnings In California State

Valuing Prizes

If your prize is a non-cash award such as a trip or a car, you will owe tax on the fair market value of the prize. There is no uniform method for determining fair market value. Neither the U.S. tax code nor U.S. Tax Court rulings have specified the proper way to set the fair market value of a non-cash prize. The sweepstakes or contest promoter will report what it considers to be fair market value. That figure may be different from the 'approximate retail value' the sponsor cited in sweepstakes advertising. But the sponsor's fair market value figure may be subject to dispute. For example, parties could dispute whether the fair market value of an automobile is the manufacturer's suggested retail price or the discounted price the sweepstakes sponsor paid to buy the car.

Exempt Prizes

You can avoid all taxes on a prize if you refuse to accept it. A prize may not be taxable if it meets certain legal tests. To be tax-exempt, the prize must be in recognition of personal achievement in religious, scientific, literary, artistic, charitable, educational or civic affairs. You cannot have nominated yourself for the prize or submitted your own work for review. You can't be required to perform services as a condition for receiving the prize. You cannot claim the prize for yourself but instead must assign the prize to charity. If you assign away the prize, you don't get a charitable donation deduction. All these tests must be met to avoid tax on the prize.

How Much Taxes Do You Pay On Casino Winnings In California Now

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How Much Taxes Do You Pay On Casino Winnings In California Today

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