How Do State Taxes Worth on Multi-State Lotteries?

Just wondering, I know you pay federal tax on lottery winnings in the USA, but what about state tax? Some states have no tax, and states have different tax rates.

So if you live in say Texas, a state without income tax but bought your Powerball ticket in a state like Illinois which has income tax, how do they calculate it.

And is it calculated on the state where you live when you bought it? What if you buy it and move to another state?

I’m pretty sure that regardless of the source, you owe income taxes to your state of residence.

Note that if you cash a big ticket in a state other than your own residence for some reason, that state will try to deduct a chunk of their state income tax (if they have one). You will have to file a non-resident tax form to get it back later. And you still have to owe any income tax your state has as well.

There are some shady areas regarding taxes in such matters. E.g., you win. You immediately move to Washington State which has no income tax or one of the states that don’t tax their own lottery winnings. You cash the ticket there.

For the state of former residence, in the cases I know of, you will still owe a proportion of income tax on your total year’s income based on the fraction of year you were a resident of the state. In the case of the current big lottery, you’d owe 1/12th of the annual tax amount if you won soon and immediately moved.

YMMV for partial year income tax in some states. E.g., it might be based on where you were when you “earned” the money. So the former state might have a claim on the tax for the whole amount. Both states might end up slugging it out over their share with you in the middle.

If you live in a state with income taxes and the state taxes lottery winnings (most don’t) the winnings are considered gambling winnings. Gambling winnings are taxes as normal income. And with a large prize that means the top bracket.

Some people in Kansas government are openly hopingfor a Kansan to win the big jackpot and then take a cash payout, because the state’s share of the taxes would plug the most recent estimates of the state’s budget shortfall.

To clear up some confusion: You have to cash your Powerball ticket in the state where you bought it and you will be paid by that state. This applies even if your own state also participates in the Powerball lottery.

The winnings will be treated as income sourced within the state where you won it and will be taxed according to the rules of the state where you won it and the state where you are a resident.

If you live in Texas (which has no income tax) and win the lottery in Illinois, you will pay no tax to Texas (since it has no tax) and pay the regular non-resident income tax in Illinois (which currently is 3.75% after deducting a small exemption). The other way around, if you are an Illinois resident and win a lottery in Texas, you will pay the full Illinois state income tax on the winnings and nothing in Texas.

California is a more interesting case. California exempts California lottery winnings (but not out-of-state lottery winnings) from state income taxes. So if a Texas resident won the lottery in California, they would not pay any income taxes to any state. But if a California resident won the lottery in Texas, they would pay California taxes on their winnings at the regular California resident rate.

A California resident who won the Illinois lottery would pay the regular income tax rate to both Illinois and California, but they would receive a credit on their California income tax return for the taxes paid to Illinois (not to exceed the amount of tax that California charges on the lottery money).

California and Arizona reverse the regular rules about claiming a credit for out-of-state taxes. If a California resident won the Arizona lottery, Arizona would withhold 6% of the winnings. The California resident would then have to file an Arizona non-resident tax return and a California resident tax return and claim the Arizona winnings as income in both states. But Arizona (not California) would grant a credit for taxes paid to California. Since California state income taxes are generally higher than Arizona taxes, this would usually result in getting a refund of all of the taxes withheld by Arizona and paying the full California rate.

Of the states that have both a lottery and a state income tax, only California, Delaware, and Pennsylvania exempt in-state lottery winnings. New York exempts lottery winnings under $5000.

Did not know that. I live in California and thought all states with lotteries exempted lottery winnings. As others have said. something learned.

What if I live in Canada but cross over to Buffalo to buy a ticket?

I read somewhere that Canadians would pay a flat 30% US tax (and nothing to Canada, which does not tax lottery winnings).

Yes, Canadians pay a special 30% rate to the federal government. They can also deduct gambling losses by filing Form 1040NR at the end of the year.

They will also have to pay the applicable state rate in whatever state they bought the ticket. I suggest you head to Pennsylvania or Washington instead of New York.