California is one of only a handful of states that do not impose any state income tax on lottery winnings. Federal income taxes still apply, however, and for larger prizes, the state will withhold money for federal taxes.
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Claiming Lottery Winnings
For lottery prizes of less than $600, winners can take their tickets to any California lottery retailer and receive cash on the spot. Retailers do not withhold any taxes or collect information from winners. For prizes of $600 or more, winners must file a claim form with the state lottery agency, and the state must report those prizes to the Internal Revenue Service. Federal income tax will be withheld on prizes of $5,000 or more. In most cases, the federal withholding rate at the time of publication is 25 percent.
Winner's Tax Responsibility
California lottery winnings are exempt from state and local income taxes. But the federal government considers gambling winnings taxable income. Winners are expected to claim lottery prizes as income and pay taxes on them -- regardless of the size of the prize, whether the state reported it to the IRS and whether any tax was withheld. Winners can claim a refund when they file their tax returns if the 25 percent withholding was excessive for their tax rate; if it's too little, winners will owe tax when they file.
When several individuals win a prize while playing the lottery as a group, they may be eligible to receive separate payments, with taxes withheld for each person, if necessary. This option is available only for scratch-ticket annuity prizes, SuperLotto Plus jackpots and MEGA Millions jackpots. Group winners of those prizes can split payments by filling out the state's Multiple Player Ownership Claim form. Group winners of all other prizes must choose someone to handle distribution of prize money. The IRS has developed Form 5754 for assessing the tax liability in such situations.