Donating winning lottery ticket to 501(c)3 Private Foundation: cost-basis deduction + full tax free redemption for foundation?
US 501(c)3 Private Foundations are typically controlled by the primary donator, so that is a nice perk, but in exchange for that perk I realize the tax deductions for donating are significantly lowered than for charities. Aside from being lower, the tax code doesn’t recognize appreciated property and only allows for a deduction based on the donating taxpayer’s cost-basis: ie. the price they paid for the property no matter its current market value.
When there is a significant delta of price paid vs current redeemable value, it seems this can still be a perk for the donating taxpayer in some circumstances, such as with lottery tickets that are known winners already.
If the donating taxpayer pays $1 for the ticket. Their cost basis is $1. If the ticket is now worth $100,000,000 but has not been redeemed, is it accurate that the donating taxpayer can donate this to their private foundation for a deduction at cost basis, and the private foundation can redeem the $100,000,000 ticket completely exempt from all lottery withholding income taxes?
(Other taxes unique to private foundations are known and outside the scope of this question.)
Most literature I can find is about appreciated marketable securities, and occasionally real estate. It doesn’t seem that the tax code specifies any distinction between property, but it also doesn’t seem the answer to this question is part of the general collective conscious even if it really is that obvious if my understanding is already correct.
Donating winning lottery ticket to 501(c)3 Private Foundation: cost-basis deduction + full tax free redemption for foundation? US 501(c)3 Private Foundations are typically controlled by the
One More Thing To Do When You Win The Lottery
Mega Millions logo (Photo credit: Wikipedia)
Deborah Jacobs’ piece 10 Things To Do When You Win The Lottery is a winner. Who doesn’t like to think about this? It’s worth reading even if winning is only a dream. But there’s one more thing to do that merits its own line item: pay your taxes.
Of course, the second of Deborah’s ten thing to-do list is to see a tax pro. Seeing a tax pro surely carries with it the idea of paying tax. Still, it pays to underscore the tax side of lottery payments because it can be a doozy. Time and again winners have trouble paying their taxes or get confused what they are taxed on, especially if they start giving money to charity, family, etc. See Year-End Charitable Contribution Guide .
Mega Millions or otherwise, winning big doesn’t mean avoiding the taxman. See How Much Tax Will You Owe On $640 Million Jackpot? Some states exempt some lottery winnings but not the IRS. But if you’re generous and give all your winnings to charity, no one can tax you, right? Actually, it depends.
Take the generous Canadian couple who had an $11.2 million lottery win and then gave 98% to charity. They only kept 2% for emergencies and to buy more lottery tickets. See Canadian Couple Wins $11 Million, Gives It Away and Canadian Couple Donates Millions From Lottery Win . That was a heartwarming story in Canada and a happy tax result but only because lottery winnings aren’t taxed in Canada.
The tax picture in the U.S. would have been grim. The IRS taxes virtually all prizes and awards, including lottery payments. Even if a winner gives all winnings to charity he or she may still end up with a big tax bill. Charitable contribution tax deductions are usually limited to 50% of your income and in some cases less.
Thus, a winner giving all the money to charity might still pay tax on half. Declining a win and turning down the money, done properly, may avoid the income entirely and be treated differently than making a gift after you win. But clearly this requires professional help. See IRS Is Taxing My Nobel Prize!
Of course, most lottery winners aren’t trying to give all the money to charity. Many face deals with family, friends and co-workers. And there again, winners clearly need tax advice. The tax messes that are triggered can be huge.
In Dickerson v. Commissioner , the Tax Court considered an Alabama Waffle House waitress who won a $10 million lottery jackpot on a ticket given to her by a customer. The Tax Court held she was liable for gift tax when she transferred the winning ticket to a family S corporation (formed for this purpose) of which she owned 49 percent. It was truly a mess with extra tax dollars generated because the tax plan was a best half baked. See Waffle House Waitress Wins Big in the Lottery, Loses at Tax Court .
So bottom line, as Deborah Jacobs notes, if you win the lottery see a tax pro! But go beyond that and plan all your tax moves carefully. Set aside money for taxes. If you do anything agressive on your return, keep a reserve. Finally, plan any transfer, whether to charity, family or friends, very, very carefully.
Mega Millions logo (Photo credit: Wikipedia) Deborah Jacobs’ piece 10 Things To Do When You Win The Lottery is a winner. Who doesn’t like to think about this? It’s worth reading even if winning is only a dream. But there’s one more thing to do that merits its own line item: […]