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I am treasurer for a Rotary Club that will give away a

I am treasurer for...

I am treasurer for a Rotary Club that will give away a $25,000 raffle prize, $25 ticket cost. What is CA tax withholding rate? What if the winner resides outside CA?

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Is reporting similar to IRS on form W2-G?

Accountant's Assistant: Is there anything else the Accountant should be aware of?

The Rotary Club is located in CA

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3/21/2018
Tax.appeal.168
Tax.appeal.168, Tax Accountant
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The CA rate is going to depend on the winner's overall income. The tax rate ranges between 1-9.3%. Federal withholding is 25%. Yes, the reporting is the same as the Form W2-G.

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My apologies, the top tax rate is 12.3%, not 9.3%.

REFERENCE SOURCE:

https://www.bankrate.com/finance/taxes/state-taxes-california.aspx

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Customer reply replied 4 months ago
How am I to determine the tax rate for CA? Seems to me the required withholding would be a fixed percentage, like 7%. Also , is the prize taxable to a non resident winner?

A non-resident is taxed on CA sourced income only, which would make the raffle winnings taxable to a non resident. SEE BELOW:

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How California taxes residents, nonresidents, and part-year residents

  • California residents - Taxed on ALL income, including income from sources outside California.
  • Nonresidents of California - Taxed only on income from California sources.
  • Part-year residents of California - Taxed on all income received while a resident and only on income from California sources while a nonresident.

REFERENCE SOURCE:

https://www.ftb.ca.gov/individuals/fileRtn/Nonresidents-Part-Year-Residents.shtml

I will check to see if I can find a flat rate for the CA withholding and get back to you shortly.

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Based on the following information, the winnings will not be taxable in the state of CA. SEE BELOW:

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Additionally, California, Delaware, New Hampshire and Pennsylvania don’t tax winnings on sweepstakes or other gambling. As this is the case, whether the person is a resident or non-resident, they will not be taxed by CA

REFERENCE SOURCE:

https://finance.zacks.com/much-state-federal-tax-owed-sweepstakes-winnings-6171.html

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Customer reply replied 4 months ago
I don't think that is correct. CA taxes everything. I thought I read that CA treats raffle winnings as gambling winnings and taxes winnings over $7,000

I can check a bit further to see what I come up and get back to you shortly.

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Following is what the IRS defines a raffle as:

“Raffle” Defined: In general, a raffle is considered a form of lottery. As such, a raffle generally refers to a method for the distribution of prizes among persons who have paid for a chance to win such prizes, usually determined by the numbers, or symbols, on tickets drawn.

REFERENCE SOURCE:

https://www.irs.gov/pub/irs-tege/notice_1340.pdf

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As a raffle is defined as a form of lottery, there is no mandatory withholding requirement. California is one of just three states that exempt lottery winnings from state income taxes – so long as the winner is a state resident who bought the ticket in California.

REFERENCE SOURCE:

http://www.sacbee.com/news/state/article54540405.html

Based on the above, a resident of California does not have to pay taxes on the winnings, however, there is a withholding requirement for non-residents because they will have to pay tax on the winnings. SEE BELOW:

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Payer withholds 7 percent of all California source payments to a nonresident payee that exceed $1,500 in a calendar year, unless payee meets a withholding exemption or qualifies for reduced or waived withholding.

REFERENCE SOURCE:

https://www.ftb.ca.gov/individuals/wsc/withholding.shtml

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Customer reply replied 4 months ago
Is your response on taxation of CA state lottery based upon the state sponsored lottery? That is exempt from state tax for a CA resident. But I can't believe non profit raffles are exempt. I will check another source and get back to you.

Feel free to do that. I have checked several sources and I am coming up with the same answer.

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More food for thought:

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The bad news was that the definition of “lottery” includes a raffle or drawing of any sort in which there are (a) a prize, cash or non-cash, (b) an element of chance, and (c) a required payment to purchase a chance.

REFERENCE SOURCE:

https://www.e-district.org/userfiles/129/file/rules_on_raffles.pdf

Tax.appeal.168
Tax.appeal.168, Tax Accountant
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Customer reply replied 3 months ago
I called the CA Franchise Tax Board, Exempt Organization Unit and they replied that the only non taxable lottery winnings is the CA sponsored state lottery. All other lottery winnings ( non- profit organizations) are considered gambling and taxable to residents and non-residents. No withholding tax is required for a state resident winner. Non-resident winner is subject to withholding. The winner's prize is reported on form W-2G to IRS and CA gets a copy from IRS.

Ok.

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