I am not certain if this goes in GQ or IMHO; mods please move if necessary.
I am writing a story. The protagonist, a 60 something man named Jake, wins a large lottery. When he purchased the ticket the young 20 something female is especially friendly and sweet. They have a nice conversation. Jake wants to give the young woman some of the winnings.
Will he be taxed twice? Once on the lump sum from the lottery and again on the gift?
From what I read on the TurboTax site; I believe he could pay off her school loans and any medical expenses she might have without paying tax.
What if he bought her a house or an expensive car. Would one of them be required to pay tax on the amount spent?
He would have to pay federal taxes on any amount in excess of his lifetime gift exclusion, which is currently $5,340,000.00 per person. It’s possible the state he lives in could impose a gift tax.
There’s a $14,000 annual gift tax exclusion available before ‘tapping into’ the life time exclusion. So if he bought her a used Kia in 2014, nothing would happen. If he bought her a Mercedes he would have to file a gift tax return for the amount of the gift above $14,000, but it’s just paperwork acknowledging the gift. To actually owe taxes on it he would need to give her more than the entire lifetime exclusion.
Yes, he will be taxed twice. He will owe ordinary income tax on the total amount he received from the lottery. He will also owe gift tax on any amount he gives to his friend, whether he gives it in the form of cash or goods (with the exceptions for tuition, etc. that you noted).
All of the taxes would be owed by him; gift tax is paid by the giver rather than the recipient.
The gift tax has an exemption of $14,000 per year, plus a lifetime exemption of $5.34 million. So he could give up to $14,000 in a single year and not owe gift tax. Any amount he gives over $14,000 would count toward the lifetime exemption. He would not owe taxes unless he gives her over $5.34 million worth of cash/goods. However, the lifetime exemption is combined with the estate tax exemption, so depending on how much he won, and how much he expects to have at the time of his death, his heirs might owe substantially more in taxes when he dies (this is to prevent people from giving away all of their money before they die to avoid estate taxes.)
For completeness, I believe tuition payments don’t apply to either the $14,000 limit or the lifetime exclusion. Payments for books and supplies don’t qualify for the educational exemption. Also medical payments made directly to a hospital don’t trigger gift reporting, though OTC medications would.
Jake meets up with the girl and they draw up an agreement to share the winnings and date it prior to the lottery. This way they are both responsible for their own tax. No one could prove that they had not actually agreed to share when they said they did, and since the state/government would be getting their whack anyway - why would they.
Well… splitting the winnings would reduce the amount of tax paid.
For income tax it’s small. For every person, some money is taxed at 10% 15%, etc, until it finally gets up to the maximum of 39.6%. Plus, each person gets their own itemized/standard deduction and personal exemptions to reduce taxable income. So the reduction in tax would be maybe 25,000 (back of the envelope approximations that ignore tons of variables).
But the main tax you’d be avoiding is the gift tax. That’s not an issue of a few thousand, it’s an issue of a few million.
The IRS has audited lottery winners to investigate agreements like you describe. They’ll look at things like whether the people had been buying tickets as a group for a long time. If you document everything and keep your stories straight, it might be easy to get through the audit, but you wouldn’t want to assume it’s a slam dunk.
(Also, with that amount of money, I’d tell people to expect an audit. The odds go up a lot when you have numbers that large on the return.)
So - If I meet Joe in a bar, and after a few drinks we decide to ‘invest’ in some lottery tickets together. Being a cautious kind of guy (and worried that Joe might leg it with the dosh) I draw up a simple agreement on the back of an envelope, which we both sign and date.
We then win $millions and split it between us. How could the IRS possibly dispute it?
Can Jake split the winnings with a non-profit? Will they have to pay tax?
For example the jackpot is $200 million. Jake has no family and does not want all the money. He already plans to give the girl who sold him the ticket a $5 million gift. But Jake wants to split the ticket with the ASPCA. Will the ASPCA have to pay tax on their half of the ticket?
There are non-profit organizations: contributions to them are tax deductible. The ASPCA is one of them. They do not pay taxes on donations either. The only twist is that if you give, say, 80% of your annual income to a public 501-3(c) (their technical name), you can’t take a tax deduction on the full 80%. You can only take the deduction on the first 50%. http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charitable-Contribution-Deductions
If our hero wants to set up a private foundation of his own, the cap will be lower. It could be 20 or 30%. But since the ASPCA is a public organization and he plans to give them a little less than $200 million, he should be in the clear.
Incidentally, when you win a $200 million lottery, that’s typically $200 million spread over many years. Most people take their winnings in a single lump sum, which is a great deal lower than the headline number. Also, the first thing smart lottery winners do is consult with a financial planner familiar with tax issues. You can see why!
I’m not sure what you mean by “the lottery.” There are dozens of state lotteries in the United States, each with its own rules, regulations, and procedures.
Most state lotteries are more than happy to accommodate groups and partnerships. The only exceptions I could find were Texas, Wisconsin, and Georgia.
The IRS even has a form for that: Form 5754 Statement by Person(s) Receiving Gambling Winnings. If you submit this form together with your prize claim, it authorizes the state lottery to issue separate Forms W-2G to each member of the group for only their share of the winnings without further investigation by the lottery. The IRS, of course, retains the right to investigate further.
It is well-established law that for income and gift tax purposes, partnerships may split lottery winnings without paying gift taxes or individual income taxes beyond the taxpayer’s share of the partnership if the partnership was formed before the ticket became a winner.
The Tax Court case everyone refers to is Estate of Emerson Winkler, Deceased, Thomas Winkler and Darrell S. Winkler, Co-Executors, et al. Summarizing: Mrs Winkler regularly bought lottery tickets on behalf of the family and the family regularly donated dollar bills to the cause. They did not have a written agreement. One day they hit the jackpot and then entered into a written partnership agreement. On advice of her accountant, Mrs Winkler claimed the prize and gave it to the family partnership. The IRS (referred to as “the respondent” in the opinion) determined that because the written agreement was entered into after the drawing, the share of the prize given to the the children was a gift and gift tax (and consequently, estate tax on her husband’s estate) was due.
The court found that sufficient credible evidence existed that showed the family members had formed a partnership before the written agreement was entered into. The court found that state and federal law did not require a written agreement in order to form a partnership. Therefore no gift or estate tax was due.
A word of warning however: The Tax Court found that a partnership existed without a written agreement. This was due in part to the Winklers’ careful and methodical handling of their affairs and their credible testimony. You might not be so lucky. There would have been no dispute if a written partnership agreement had been entered into in a timely manner.
Just for the sake of completeness, you can carry over the unused deduction for up to 5 years. But you probably won’t get to use up the whole carryover amount unless you regularly have taxable income in the millions.
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion remains $14,000 in 2014."
So minor correction on your post: You can give $14,000 to each of any number of people each year. So you could, for example, go completely nuts and give $14,000 each to 1,000 people. It would only cost you $14 million to do it.
Then of course, the next year* they’d all be lining up at the trough again.