Mega Millions Tax Tip

Mega Millions jackpot is over a $1 billion tonight. (Drawing closes 745 PM PST)

Some people say the lottery is a tax on fools.

People do win. In my first job, I had a lottery winner in San Francisco who won $27 million.

If you’re a big winner, here are a few lottery tax tips:

Lottery winnings are taxable as ordinary income. The maximum federal tax rate is 37%.

However, California does not tax California lottery winnings.

For California residents who want to minimize their taxes, make sure your Megamillions or Powerball ticket is sold by a California lottery retailer. If you buy your multi-state lottery ticket in another state, those winnings will be taxed to California. Winning the jackpot from a ticket purchased outside California would then subject you to the maximum 13.3% California tax since it is not sold by a California lottery retailer.

For prizes up to about $15 million, there will be tax savings if the 30 year payment option is selected. Having your payments spread over 30 years likely will have some of your payments taxed at lower tax brackets instead of a majority being taxed at the 37% maximum tax rate. However, keep in mind that Trump’s tax cuts do expire in 2025. If not renewed, the maximum ordinary income rate will increase to 39.6% in 2026.

If the 30 year annuity payment option is selected and you then sell your annuity stream to a third party, don’t expect capital gains treatment as this transaction would be subject to the ordinary income tax rates.

The IRS will require withholding tax which could be lower than the actual tax due on the income. The federal withholding rate under applicable to winnings of $5,000 or more from sweepstakes and lotteries is 24%.So don’t spend your winnings all at once since the big winner need to pay at a 37% rate (instead of the 25% withheld). For 2024, the 37% rate starts at $609,351 taxable income ($731,201 joint as the marriage penalty kicks in at the 35% and 37% tax brackets which are not double the single bracket).

Gifts from lottery winnings may trigger a gift tax filing requirement for the person making the gift. Don’t forget, the annual exclusion for gifts increases to $19,000 for calendar year 2025, rising from $18,000 for calendar year 2024. Note: No actual gift tax is paid until you are in excess of the lifetime estate and gift tax exemption. The estate and gift tax exemption will be $13.99 million per individual for 2025 gifts and deaths, up from $13.61 million in 2024. 

And yes, I do accept gifts from lottery winners.