These questions are asked in the context of U.S. federal tax law. It will be useful to know that the current exemption for gift tax is $16,000 per year per recipient.
Scenario 1 (the easy one): Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing and knew the ticket had won nothing. (Assume the losing ticket has absolutely no monetary value as scrap paper or a collectible). I am pretty sure that neither Doe nor Roe incurred any income tax or gift tax liability as a result of this exchange.
Scenario 2: Doe purchased a two dollar Powerball ticket and gave it to Roe before the drawing. The ticket won nothing. I am pretty sure that neither Doe nor Roe incurred any income tax liability as a result of this exchange. If Doe has not given Roe any other gifts during the tax year then he did not incur any gift tax liability. But what if Doe has already given Roe over $16,000 in gifts during the tax year. Is the value of the gift two dollars because that what Doe paid for it or is the value of the gift zero dollars because that it what it eventually turned out to be worth? In other words, what is the value of the gift at the time of the exchange and is this relevant?
Scenario 3: Doe has not given any other gifts to Roe during the tax year. Doe purchased a two dollar Powerball ticket and gave it to Roe before the drawing. The ticket won $1,000,000. Has Doe incurred a liability for gift tax? Was the ticket worth $1,000,000 at the time of the exchange? Is this relevant? Or was the gift only worth $1,000,000 after the exchange and after the drawing? Who incurred the income tax liability, Doe or Roe?
Scenario 4: Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing and knew prior to the exchange the ticket won $1,000,000. I am pretty sure that Doe has incurred the liability for both income tax and gift tax in this scenario and that Roe has not incurred any tax liability. Does anyone disagree? (I suppose the disbursement of the prize might get a bit messy when they try to figure out the withholding.) ( Someone might ask why doesn’t Doe claim the prize and give cash to Roe. I say that someone is just fighting the hypothetical.)
Scenario 5: Doe has not given any other gifts to Roe during the tax year. Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing. The ticket won $1,000,000. Doe had absolutely no knowledge that the ticket won until well after the exchange. Has Doe incurred a liability for gift tax or income tax? Has Roe incurred a liability for income tax?
Thank you Riemann. I forgot to engage my brain in the first post and did not consider the lifetime exemption for gift tax. Please consider the following revised OP:
These questions are asked in the context of U.S. federal tax law. It will be useful to know that the current life time exemption for gift tax is $12,920,000.
Scenario 1 (the easy one): Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing and knew the ticket had won nothing. (Assume the losing ticket has absolutely no monetary value as scrap paper or a collectible). I am pretty sure that neither Doe nor Roe incurred any income tax or gift tax liability as a result of this exchange.
Scenario 2: Doe purchased a two dollar Powerball ticket and gave it to Roe before the drawing. The ticket won nothing. I am pretty sure that neither Doe nor Roe incurred any income tax liability as a result of this exchange. If Doe has not given any other gifts to anyone during his lifetime then he did not incur any gift tax liability. But what if Doe has already given over $12,920.000 in gifts during his lifetime. Is the value of the gift two dollars because that what Doe paid for it or is the value of the gift zero dollars because that it what it eventually turned out to be worth? In other words, what is the value of the gift at the time of the exchange and is that relevant?
Scenario 3: Doe has not given any other gifts to anyone during his lifetime. Doe purchased a two dollar Powerball ticket and gave it to Roe before the drawing. The ticket won $100,000,000. Has Doe incurred a liability for gift tax? Was the ticket worth $100,000,000 at the time of the exchange? Is this relevant? Or was the gift only worth $100,000,000 after the exchange and after the drawing? Who incurred the income tax liability, Doe or Roe?
Scenario 4: Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing and knew prior to the exchange the ticket won $100,000,000. I am pretty sure that Doe has incurred the liability for both income tax and gift tax in this scenario and that Roe has not incurred any tax liability. Does anyone disagree? (I suppose the disbursement of the prize might get a bit messy when they try to figure out the withholding.) ( Someone might ask why doesn’t Doe claim the prize and give cash to Roe. I say that someone is just fighting the hypothetical.)
Scenario 5: Doe purchased a two dollar Powerball ticket and gave it to Roe after the drawing. The ticket won $100,000,000. Doe had absolutely no knowledge that the ticket won until well after the exchange. Has Doe incurred a liability for gift tax or income tax? Has Roe incurred a liability for income tax?
The value, if any, of an as-yet undrawn ticket is at most what the giver paid for it. Strictly speaking there is no de minimis exemption to gift tax, but one rarely worries about tiny gifts like a couple of dollars.
If the ticket has already been drawn and is known to be worthless, if then given, the thing given has provably zero value and no tax is owed.
If the ticket has already been drawn and is known to have value, be that $3 or $3M, if then given, the thing given has full value and gift tax on the value of the winnings is owed, though is perhaps covered by the annual or lifetime exclusion amounts. Note it doesn’t matter if the giver already knows the ticket won at the moment of transfer; only that it actually did win before the moment of transfer.
All IMO and worth what you paid for it. Which is less than one lottery tick’s worth. IANA tax professional.
I wonder if this has ever been tested. When I first glanced at the OP, I thought “interesting but just theoretical”, but then I realized that I had done exactly this the last time there was a huge jackpot. I bought a bunch of extra tickets for friends who couldn’t make it to the gas station (you couldn’t get them online). I still had the tickets in my possession but snapped images of who got each one with a joke that I get “a cut” (undefined) if they win. There must be precedent for something like this happening and then the ticket winning.
Damn good question, and not one I’m even remotely qualified to answer. You can sure see the self-serving answer for the giver is it was given pre-drawing, whereas the much less but still self-serving answer for the receiver is it was given post-drawing.
Suppose you didn’t know it was already a winning $100,000,000 ticket when you gave it away but it was determined that you are liable for the income tax and gift tax. Would the recipient have any legal obligation to help you out with those taxes? If not and the recipient is a total a*****e then it would put you in a rather uncomfortable situation unless you were filthy rich.
It does not have a million dollar value when you give it away. It’s a blank (but winning) ticket. When the recipient signs the ticket and turns it in it acquires value. The giver owes nothing.
I’m pretty sure that the value of the gift is $2 , its worth at the time of the exchange - but it would only be relevant if Doe had not only used up the lifetime gift/estate tax exemption but also gave Roe more than the yearly exemption amount which is separate from the $12 million.
I have turned in several winning Powerball tickets without signing them. I don’t believe signing it is a requirement, at least in my state. Unfortunately, none of those winning tickets were for more than four dollars.
I highly doubt the signature has any relevance at all. There are plenty of gifts that don’t even have an official “face value”, but they’re still subject to taxation. In such cases, the value to be taxed is the reasonable fair market value, or something to that effect. And the reasonable fair market value of a known-to-be-winning but unsigned lottery ticket is obviously the value of the jackpot.
The signature establishes the owner of the ticket. If Doe had signed the ticket, Roe cannot turn it in. The Ohio Lottery urges holders of winning tickets to sign them immediately and store them in a safe place until turned in. You can turn in winning tickets without a signature only if they are under the minimum reporting value. In Ohio that is $599. The rules also change at $5000 and I think $25,000. Winners of a Lottery jackpot must contact the commission and make an appointment to appear. You will also be checked to see if you are under a child support order.
The signature establishes ownership but it doesn’t change the value. If I have a twenty million dollar winner, it’s worth the same amount the second after I sign it as it was the second before. In terms of taxation, in some respects how much the ticket is actually worth when it is exchanged doesn’t matter - even if me giving you a twenty million dollar winner means I should technically be paying gift tax on the $20 million gift as well as income tax , if I give it to you unsigned under circumstances where no one knows exactly when I gave you the ticket, you will be expected to pay the income tax since you are claiming the prize - and you will not be able to avoid it simply by saying I gave you the ticket after I knew it was a winner and therefore I should be paying any tax, as it was a gift to you.
I am not saying this is impossible, but it would take a rather unusual set of circumstances for no one, including you and I, to know at least approximately, when the transfer took place. “Exactly” when it took place might be another matter, especially if the gifter, giftee, and an observer were moving at different velocities relative to one another. But I digress.
If in fact the gifter knew that it was a winner before the exchange, would the gifter incur income tax liability? However, proving this might be troublesome if the gifter is not honest. Oftentimes in discussions like these, it is useful to assume the facts posited in the scenario are true and can be proven and relegate methods to prove the facts to a separate discussion. Nonetheless, your point is well taken because when you tell the I.R.S. that someone else won the $100,000,000 and that you don’t owe any income tax they might be more than just a little skeptical.
No matter what, I am sure that the I.R.S. will insist that someone pays the income tax and they will withhold taxes from the jackpot before it is disbursed.
My plan if I won one of the giant jackpots would be to get my brother to give me a dollar and then claim we are each entitled to half the money. I think that would be cheating though.
That’d make very little difference in the total tax burden, though. The top tax bracket (39%) kicks in at about half a million dollars, while a “giant jackpot” is probably over a billion. So if you take the prize all for yourself, 99.95% of it would be in the top tax bracket, while if you split it with your brother, only 99.9% of it would be in the top tax bracket.
Yeah, the thing that makes a huge difference is whether gift tax is ALSO payable. I get the sense that people in this thread are posting what they think are “common sense” opinions about whether/when a gift of $2 or a gift of a billion dollars has been made when you gift a ticket, but nobody actually knows the law on this.
Here’s an account of someone who tried to share winnings with their family that shows how tricky it is. It looks in order to avoid gift tax you need to be sure that this agreement is clear enough that your brother could enforce it as a contract if you changed your mind.