Do you have a cite as I don’t think that’s true?
Courts have ruled that a check (which can be deposited into your account) is constructive receipt, but I’ve never heard of a lottery ticket (which must be verified by the lottery commission before being paid) is considered constructive receipt, even by the IRS. And what about a person who wins the lottery on December 28th, 2011, but truly doesn’t realize he’s won until May, 2012. Is the lottery commission going to back-date the 1099?
I haven’t heard of constructive receipt being an issue in lottery-winnings taxation before, either.
[Moderator Warning]
Since you obviously knew this was against the rules but went ahead and posted it anyway, this is an official warning for a personal attack in GQ. Don’t do this again if you want to retain your posting privileges.
Colibri
General Questions Moderator
I’ve seen cases wherein the taxpayer wanted “constructive receipt” in the year of the drawing but was unable to present the ticket to the lottery commission until the following week (in the next calendar year).
I’ve never seen a case wherein the I.R.S. argued that constructive receipt occurred in the year of the drawing, not the year of payment.
I remember a long time back a guy in Chicago won a big prize, over 25 million, to be paid in installments. He died after a couple years, and the IRS hit his heirs with a huge tax bill for the full amount payable immediately even though they would only get the partial payments over the remaining years. See a lawyer.
In this case, the issue is estate taxes. Let’s say, at the time of death, the fellow was expecting 18 more annual installments of $1 million each. The present value at time of death of that annuity might be $12 million. Assuming no other assets, this fellow had an estate of $12 million for which (I’m guessing) $3.5 million in estate taxes would be due. The estate tax is due now, not when the money rolls in. The fellow didn’t have $3.5 million with which to pay the estate tax as the estate’s value was based on future payments.
So, not only do the heirs get to pay estate taxes on money that they don’t have, they get to pay income taxes when the money does come in.
Really? If they inherit an estate of $12M - whose only problem is that it is not yet paid - then why would it count as income a second time when it is paid?
That would be like a lawyer or architect or some professional earning a commission over several years; IIRC, here in Canada, you the lawyer pay taxes on your legal fees as you earn them, even if you don’t bill until the case is closed. But you don’t then count the income a second time.
If the IRS said “you have titletoday to $12M in FCS (future cash payment)” they can’t now say “you didn’t have title to this then, now you do, so the new stuff is is new income.”
If you inherit a house valued at $12M but don’t sell it, you pay the taxes as if you did. If the you n sell it for $12M, you don’t pay capital gains on $12M all over again…
Because lottery winnings are income. If you die before your pre-tax IRA has been distributed, you get to pay estate taxes on the value and then your heirs pay income taxes when the IRA is withdrawn.
There’s lots of double taxation in the USA. Everyone is quick to point out that Romney’s taxes are about 15% of his income. The bulk of his income is corporate dividends which have already been taxed at 35% before Romeny pays another 15% of what’s left. So the real tax rate is about 45%.
Not only did I pay income tax on half of my Social Security wages when I was working, now I get to pay income taxes on 85% of the SS benefits I receive.
It doesn’t count as income a second time. It is taxed once under the estate tax (paid by the estate), and then again under income tax. These are two different tax systems; one taxes income and the other taxes assets.
Look at it this way: Had the lottery payments been fully paid out during the original winner’s lifetime, he would have paid income tax each year; the estate tax would then have been paid on the cash value of his savings or assets. Instead, the estate tax was paid on present value of assets (what you’re estimating at $12M) and the beneficiaries pay the income tax. In both scenarios, the money is taxed under both tax systems; it’s just the order that changes.
(For what it’s worth, it would have been trivial to prevent the beneficiaries from inheriting a large debt with a little estate planning and some arrangement of trusts and/or life insurance policies. This is why you talk to lawyers and accountants early on in the process. Blaming the law in this case is like blaming Honda because your car ran out of gas.)
But bizerta’s point about double taxation is a good one. Lots of people walk around thinking “income can only be taxed once” as if it’s some unbreakable rule of the tax code. In reality, things are taxed when the tax code says they are, even if that means it’s twice.
If it’s any consolation,IRC Section 691(c) allows the person who receives the payouts to claim an itemized deduction on his income tax return for the pro-rated portion of the estate taxes.
Move to Canada. Our Lotto Max jackpot only accumulates up to $50 million (anything over that is spun off into separate mini-jackpots) but it’s all tax-free, man! And no estate taxes for your heirs if you haven’t blown it all! 
I am a tax lawyer, but I’ve done no research on this, so the following answer is purely out of my learned and experienced ass.
All human beings are cash method taxpayers, meaning they don’t have income until they get cash (or property). So, the general rule is that you aren’t taxable on lottery winnings until you get the cash.
Here are a couple of arguments that could change the general rule (but IMHO ultimately fail and therefore don’t change it in this case).
First, one could argue that you are in constructive receipt of the winnings immediately after the drawing because you could turn the ticket into the proper authorities and get the cash at any time. However, turning in the ticket and having it verified as a winning ticket is a necessary step to being entitled to receive the money. The constructive receipt doctrine is grounded in a taxpayer having a present right to cash or property but turning their back on it. That’s not the case here–you don’t have the right to shit until your ticket is verified as the winner.
Second, one could argue that your tick is valuable property immediately after the drawing, so you should be taxed on its value at that point. But that’s an even worse argument than the first one. Taxpayers aren’t taxed on the increase in value of property they own until that increase in value is realized. You realize the difference between a piece of paper with numbers on it and a winning lottery ticket only when you turn it in and it’s verified as a winner.
Yes, I’m astounded at the double taxation logic. I would have assumed the estate tax is a tax on the heirs, not the dead guy, in lieu of income tax.
How bizarre.
Of course, if you move to Canada, you would have to renounce American citizenship or you would still have to pay taxes to the IRS - another US anomaly.
You can even win big in Vegas, and then get all your withholding back once you prove you have left the USA and are back in Canada.
As for Mitt - IIRC yes, this strays into GD but the extra tax on dividends is a fee for the privilege of incorporation, he risks none of his own money if the company were to go bankrupt, say, and lay everyone off and end with a net debt; not the case with a personal business or partnership, which is why almost everything is incorporated today. Plus there are tricks to convert income into capital gains that are also taxed at a very low rate.
I’ve heard this said on several occasions, but I’ve never seen any documentation. Do you have a cite for that. Taxes are generally paid where the money is earned. Canada may not tax gambling winnings, but the money was earned in the US. Why would the USA give up taxing US winnings?
I looked into one Canadian lottery that typically returned 45% of the money to the winners. The Massachusetts Lottery, typically returns about 60% to the winners. In this one example (which may not be representative), the tax is effectively taken from all winners. Here in the USA, we only the big winners have withholding and pay tax(the rest are small potatoes).
IIRC, it’s because of the tax treaty. Canadians are taxed on income from the USA the same as if you earned it in Canada, all deductions and such apply as well. So, it’s just Canadians, not evrybody.
If anyone from Canada is confused, there are billboards all around the border crossings advertising services that help - if filling out a givernment form confuses us.
Sorry - checked google and it’s even more bizarre:
http://www.articleclick.com/Article/How-to-Get-Gambling-Tax-Refund-for-Canadians-Winning-in-Las-Vegas/1500338
You are wrong. A limited partner and a member of an LLC also risk none of their own money. And it’s not the case that “almost everything is incorporated today.”
Canadians can deduct gambling losses from gambling winnings to recover the withholding tax. e.g. if you won $8000 in the Ohio lottery and had $2400 withheld, you can deduct your gambling losses from the $8000 win and pay 30% of your net gambling winnings for the year to the IRS. If you can’t show documentation of gambling losses, you can’t get a refund. It appears that the Canada tax treaty allows gambling losses in Canada to be deducted from USA winnings.
The advantage here: If you have $8000 in USA winnings plus $5500 in Canadian winnings and can document $6400 in gambling losses, the $6400 in losses can be deducted from the USA winnings of $8000 and you can have $1920 of your $2400 withholding refunded. None of the $6400 in losses needs to offset the $5500 Canadian winnings.
This confuses me. In my hypothetical, I don’t even come forward with the winning ticket until it’s already 2013. I could claim that I found this bearer instrument on the sidewalk while cleaning up Times Square on January 1, couldn’t I?
I say that’s not true. Show me a case wherein the IRS took that position, whether or not they won.
If you don’t claim the money until June, does the lottery commission back-date the 1099? What happens if you’ve already filed your income tax return?
IF that happened, you’d file a 1040X and amend it, just like in any other case of forgotten or previously unknown income from previous years. But if it is true that the “IRS took the position that the winner has constructive receipt of the winnings on the date of the drawing,” I’d like to know too, and think it would be the exception rather than the rule.