Lottery winnings and giving to others

Factual Questions
1

Hello Everyone,
I realize that there are a lot of you out there that consider the lottery nothing more than a tax on the stupid. I play the lottery, a whole $2 a week. No, I really don’t think I have a realistic chance at winning, although it is a possibility. The reason I purchase a couple of dollars of tickets a week is for the mental entertainment. It is fun to dream about what you could and would do with the money if you won.

So, with that thought, I was talking to my wife the other day about winning the lottery and what we would do. We think alike in that our first priority would be helping out our close friends and family. Not “supporting” them, but give them a bit of help. Possibly pay off a house or get one a new car because theirs is a 20 year old rust bucket. Pay off some overwhelming bills, whatever… The question I had is if you were fortunate enough to score a big lottery win, say $100 million and you weren’t a self-absorbed douche and decided to help those close to you and perhaps some random strangers how would you go about it from a tax standpoint.

What I mean is let’s say that I purchased my sister a house and bought my parents a new car. What are the tax liabilities they are going to incur? If that house cost say, $150k will my sister now owe the IRS taxes on that money? What about a random stranger? Say I decide to help a worthy homeless person out (by worthy, I mean one who is there because of circumstances beyond their control. Lost job, medical issues etc… Not so much a drug addict that more than likely will continue to use and misuse the help you give. I mean someone that wants to get their life back on track). Say you find this homeless person, get them an apartment, clothes and car etc… Can you do that without the IRS coming down on you like a thunderbolt?

I know that if you win for example a car on a game show you are taxed on the value of that car like it was income. But does the same hold true if someone just purchases you one out of goodwill?

2

If you give gifts to anyone (houses and cars count) and the value of the gift is above a certain limit (I think it’s $12,000 these days) then you will have to pay federal gift taxes on the gift. Note that gift taxes are paid by the giver, not the recipient. The person getting the new house won’t have to pay gift taxes on it. However, they will have to pay subsequent real-estate taxes and the usual costs of upkeep and so forth, which can be quite a burden for a large property, so keep that in mind. You know, for when you win. :slight_smile:

If your goal is to help a homeless person by giving them shelter, you could form a charity and have the charity buy or lease a dwelling which could be sublet to said hobo for a nominal fee. That would get you a nice charitable deduction.

ETA: The IRS does have a few gift tax exemptions: I know that paying off someone’s tuition is usually exempt, and so are paying off certain medical bills.

3

So, if Oprah gives away cars the people receiving them don’t pay the taxes, but Oprah does?

What about game shows like “The Price is Right” where you win a car?

4

Game shows winnings aren’t outright gifts. They are prizes to be won in some fashion (though sometimes this just means being a lucky person in the right time and the right place). As a recipient of a game show prize, you are liable for any state and federal taxes. At least for game shows taped in CA, they’ll often automatically deduct CA state income taxes before sending you a check.

5

So if Oprah gives me a car she pays the taxes, well Harpo Meglagoogleplex Corp. does.

But if I receive a car because I guessed a number that was closer than yours (without going over!) I have to pay state and federal taxes on it? I see.

6

I’m pretty sure that’s the case. It would depend on how Oprah’s people handled it. Not an issue now that she’s no longer taping, of course.

Tone is rather difficult to judge online, but it seems you think there’s something wrong with this arrangement. Care to explain why?

People typically appear on a game show for the explicit purpose of winning prizes. While Oprah was known for being generous, people showed up to tapings for the explicit purpose of watching the taping, not for winning prizes.

7

The recipient does not pay US federal tax on a gift. (However, in the case of a fraudulent transfer, the government can seek to recover unpaid taxes from the proceeds of a gift.) There is a tax called the “gift tax” (which is a completely separate tax from the income tax) that the donor must pay.

There is an annual $13,000 (current value, but changes annually based on inflation) per year per recipient gift tax exemption. That means any person can give any other person $13,000 in gifts during a year and they will be totally ignored for gift tax purposes. For example, if you have ten friends and want to give them $13,000 each this year, you can totally ignore gift taxes. Your spouse can also give the same ten persons another $13,000. If you are married, you can even give each person $26,000 if your spouse doesn’t give any gifts and consents to “gift splitting” on Form 709. Different rules apply if you want to give a gift of a “future interest.”

What happens if you give a person more than $13,000? You have a $5,000,000 unified gift/estate tax exemption. You have to file Form 709 to report the gift, but no tax will be due until you use up the $5,000,000 exemption. For example, if you give one friend a $14,000 gift, you need to file Form 709 to report it and your unified credit will be reduced by $1000. If you give ten friends each $14,000, then your unified credit will be reduced by $10,000.

When you die, whatever is left of your unified estate/gift tax credit is used to reduce the federal estate tax due on your estate. The $5,000,000 figure is new for 2011. Before 2011, you could use a maximum of $1,000,000 of your lifetime unified credits to offset gift taxes.

Also, you may make unlimited gifts of payments to medical service providers (paid directly to the service provider), tuition payments (not room and board, paid directly to the school), charitable contributions, and political contributions which are not subject to gift tax and do count against the annual or lifetime exemptions.

While we may think of Oprah’s prizes as gifts, they do not fit the tax law’s definition of a gift. They are not given in the spirit of “detached generosity” but rather are meant to promote her show. As such, they are subject to income tax payable by the recipient.

8

Note: the people receiving the cars from Harpo Ltd. also had to pay state and federal income taxes, just not the Federal Gift Tax. This was quite an issue with show attendees from time to time. Some people didn’t have the spare income to pay those sudden taxes. I’d heard that games shows actually check that the contestants can afford to pay the taxes.

9

Never mind. Sorry.

10

You guessed my tone correctly, but now that I see Harpo is subject to the same rules as Drew my tone has changed back to acceptance. Because otherwise the rules were dumb.

11

If the goal is giving to random strangers, I’d say the best way to go about it is to donate through a charity. You won’t get to pick the exact stranger (doing so would invalidate it as charitable giving) but you can always tell the charity the kind of stranger you want them to pick. Giving through a charity both eliminates the gift tax and gives you a deduction on your taxes.

If you wanted to get really fancy, you could set up your own charity. Give money to the charity, for the deduction, then appoint yourself to the board of directors to help pick out who benefits. There are lots of rules and regulations down that road, but a generous lottery winner might find it worth the effort. Just get a good lawyer and CPA to make sure it is all done right.

12

I had always assumed game shows withheld the taxes or something but that’s actually not the case. The first winner of Survivor took the full $1m prize and refused to pay taxes on it, he was later convicted and served a prison term for that action.

It looks like game show winnings are just normal 1099 income, so if you win a car you have to put the value on your 1099.

What that does mean is you have a window between receiving your prize and when you have to file taxes. During that window you can, if the tax bill is too high for you to afford, liquidate all of the prizes and set aside enough of that money to pay taxes and then you will still come out well ahead.

13

When it comes to federal withholding in the United States, there is a fine distinction between a sweepstakes and gambling. Gambling proceeds, when they exceed a certain level, are subject to withholding. Sweepstakes proceeds are not. This is what causes a lot of the misunderstanding.

Say for example, you enter a no-purchase-required drawing at a grand opening of a local grocery store and win $10,000. No federal withholding. (State withholding may apply.) The prize is reported on Form 1099-MISC.

On the other hand, say you buy a $1 lottery ticket or a $1 church raffle ticket. That is gambling. If you win $10,000, federal withholding applies (and possibly state withholding). Your winnings are reported on Form W2-G.

This leads to the interesting situation: What if that $1 church raffle ticket wins a car instead of cash? If the car is expensive enough, federal withholding does apply. There are two ways to handle this: 1) The church can use its funds to pay the withholding. In this case the funds are added to the value of the prize and become taxable income to you. 2) You have to pay the church the withholding amount in order to claim your car and they remit the money to the IRS.

The second option, of course, raises much concern. We have all received the bogus email that says we have won some jackpot and all we have to do is wire some money to cover the taxes and our jackpot will be on its way. And we have all been warned never to send money to claim a prize. Two things to remember: You never have to send money to cover taxes on a cash prize, taxes will simply be deducted from the prize. Your pastor is not trying to rip you off if he says he needs money to give you the car you won in the church raffle.

Which leads to another point: A lot of people think that if taxes were withheld from their winning, then their tax obligation is satisfied. Not necessarily so. The withholding is more like a security deposit. You still have to report the prize on your year-end tax return and calculate the actual amount you owe. You may owe more than was withheld or you may be due a refund.

14

Alley Dweller, thanks for taking the time to answer these questions clearly and thoroughly.

15

In another thread about sheets of uncut paper oney, there’s a link to Wozniak describing his antics with pads of $2 bills. In passing he mentioned that to teach his 12yo daughter a lesson about gambling odds, he let her play a Keno game. She won $7600.

So first, he had to cash in the winnings because she was under-age. Then he gave her the $7600. This cost him about $7600, because first he had to pay about half the amount as income tax on the winnings, then he had to pay tax on the $7600 to her since he’d already hit her annual $12,000 gift limit.

16

Of course, if he really wanted to teach her a lesson, he should have just given her the winnings less the withheld income taxes. :wink:

17

Interestingly enough, there is no gift tax or tax on gambling/lottery earnings in Canada. After all, gift or not, it was taxes as income when the giver earned it in the first place. Thanks to reciprocal tax treaties, anything a Canadian earns (sorry, wins) in Vegas, they can get the withholding amount back when they prove they have crossed the border. When you win the lottery for $50M, you get… $50M. However, you will pay income taxes on the interest it earns sitting in the bank.

18

That’s not a very big problem, nowadays :wink:

(Or do you have like 5% interest on bank deposits in Canada? Where do I sign up? :cool:)

19

Interesting question:
Suppose a parent gives a house or car to his or her kid. Is there a gift tax? Could s/he instead sell the house or car for $1 rather than give it?

20

Taxes are only payable on earned income in Australia. That includes wages, capital gains, rent, some share dividends, interest, stuff in a salary package like a car but excludes gambling/chance winnings unless you are a professional gambler.

There is no such thing as a tax on giving something away.