Lottery ticket bought by / donated to a charity tax Q

[jharvey963]

@md2000

I guess one question is, can you move house to a state with lower taxes before cashing in, or is it the day of the draw that determines your state of taxation?

In the California Lottery, California does not tax the winnings. You still get taxed from the Federal level, however. So moving to a different state is unneeded.

I don’t know how other states treat lottery winnings.

J.

[Canadjun]

@kanicbird

And from the above, the general question is there a way to get all the money tax free from lottery winnings?

Move to Canada, renounce your American citizenship (if I understand your tax laws correctly), and buy Canadian lottery tickets :D. Lottery winnings are tax-free up here.

[Shagnasty]

The lottery is a good example of how money eventually gets to the government no matter what.

Congratulations you just won $100 million in the lottery.

People spent about $200 million on those tickets for the prize so half is gone right away. That’s fair. They designed the game to make money, not provide a charity. You probably want that in a lump sum so that $100 million is now $50 million. Depending on your state, cough up another 35% or so for taxes. You have about $32 million free cash. Cool.

I hope you aren’t planning on actually buying $32 million in stuff though. All of it is taxed through sales taxes, property taxes, and lots of other ways filtering down transaction by transaction. Out of the total pot of $200 million people pitched in originally into the hat, you get to buy about 10 - 15% worth of things for you and your family out of that. Who is complaining though? It was just a dollar ticket. The problem is that this concept applies to people’s paychecks and everyday financial transactions too (minus the severe upfront hit on the lottery pool just for playing).

[Alley_Dweller]

@Tastes_of_Chocolate

Why would a lottery ticket be treated differently than stocks?

If I donate stock to the local public radio, I can claim the current value of the stock as a charitable donation, and I don’t have to pay capital gains taxes, and the radio station gets to sell the stock, keep the value and not pay taxes on it.

Not quite true. You can only claim the FMV as a deduction if the stock would have been a long-term capital gain property in your hands. If sale of the stock would have generated a short-term capital gain or ordinary income in your hands, you can claim no more than your basis in the stock (or the FMV, if less). Technically, you can claim the FMV minus the amount that would be short-term capital gain or ordinary income.

For example, let’s say you bought a share of stock for $100. It is now worth $200. Nothing unusual like a split or return of capital has happened. If you give it to your local public radio exactly one year later, you get a $100 deduction. If you give it to your local public radio one year and one day later, you get a $200 deduction.

I haven’t heard anyone make a claim that the post-drawing increase in value of a lottery ticket is a capital gain. In any case, most lottery tickets have to be redeemed within 6 months of the drawing (I don’t know how far in advance you can buy them).

See Publication 526.

On further review, I did find a case where someone tried to claim that a lottery ticket win is a capital gain. The claim was shot down by the courts:
Watkins v Commissioner.

Lottery winnings, whether received initially and wholly in a lump sum or in annual payments, are treated as ordinary income under the tax code.(4) C.I.R. v. Groetzinger, 480 U.S. 23, 32 n.11 (1987) (equating a state lottery with public gambling in case treating gambling earnings as ordinary income); Maginnis, 356 F.3d at 1183 (“Lottery prizes are treated by the tax code as gambling winnings, which are taxed as ordinary income.”); Davis, 119 T.C. at 4 (“The parties agree that an amount received as a lottery prize constitutes ordinary income.”).

[Alley_Dweller]

@md2000

I guess one question is, can you move house to a state with lower taxes before cashing in, or is it the day of the draw that determines your state of taxation? Or else “honest, I sold my mother in the low-tax state 50% of the ticket before the draw…”)

The rule, which most Americans don’t understand, is that income can be taxed by BOTH the state where it is sourced and the state of your residence.

For example, if you live in New Jersey but work in New York, both New York and New Jersey tax your salary. However, New Jersey gives you a tax credit equal to the lesser of the amount you paid New York or the amount of the New Jersey tax on the dual-taxed income. In the case of a California resident who works in Arizona, both states will tax the income, but Arizona (not California as you would expect) would allow the credit for California taxes paid. A resident of Pennsylvania working in New Jersey would pay taxes on his salary only in Pennsylvania due to an inter-state compact between NJ and PA (but would still pay NJ taxes on any other type of income sourced in NJ).

Lottery winnings can be considered to be sourced in the state that sold the lottery ticket, depending on state law. New York considers New York state lottery winnings to be sourced in New York. West Virginia does NOT consider WV lottery winnings paid to non-residents to be sourced in WV. California does consider CA lottery winnings to be sourced in CA, but CA lottery winnings are exempt from CA state income tax (other state lottery winnings are not exempt from CA income tax).

If someone moved between the time of the drawing and the time of redeeming the lottery ticket, whether their new state of residence could make a claim on the winnings would be a matter of state law.

So the answer to your question is, “it depends.”