Powerball doesn’t pay off for state tax collectors

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The Internal Revenue Service is indeed the big, and only, winner when it comes to tax collection on the $1.5 billion Powerball lottery.

Winning tickets were sold in 3 states — one each in California, Tennessee and Florida. None of those states tax lottery winnings.

Let’s go west to east with the no-state-tax details.

No lottery tax in California

The Golden State catches a lot of flak for its high tax rates. Its top individual income tax rate is 12.3%, with a 1% surcharge tagged on for folks making $1 million or more.

Given the payouts of the huge Powerball jackpot, even after splitting it at least 3 ways, the California winner ends up in that top tax bracket.

But the lottery luck in California extends to state taxes.

“You’ll be happy to learn that Lottery prizes are exempt from California state and local personal income taxes,” according to the California lottery winner’s handbook.

Only investment income taxed in Tennessee

The Volunteer State doesn’t collect income tax on wages or winnings — only on certain investment income.

So the Tennessee Powerball winner might want to consider taking his or her payments via the annuity option.

Sure, the money is held by the lottery commission in safe, and lower-interest-paying investment instruments, typically government bonds. However, since the lottery winner won’t be in possession of the money while it’s earning interest, then the winner won’t owe on the interest earned that is included in the next annuity payout.

So you trade off potentially lower earnings for non-taxed earnings. And given the current volatility in the stock market, it’s likely that the winner would choose to go with safer, lower-earning investments anyway.

No income tax at all in Florida

Welcome to the Sunshine State, where the lucky Powerball winner, just like every other Florida resident, never pays a state income tax.

Florida is one of 7 states — the others are Alaska, Nevada, Texas, South Dakota, Washington and Wyoming — that don’t have any income tax at all. Tennessee, as we already know, and New Hampshire only tax dividend and interest income.

What were the odds, since most states collect income taxes on prize winnings and the Powerball is played in many of them, that state tax collectors would come up empty on a $1.5 billion jackpot? I have no idea.

But one thing I am sure of: There are some state tax department officials across the United States who are as glum today as the Powerball winners are happy.

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