If I should win the lottery and start a 501(c)(3) prior to collecting the winnings, would I be exempt from federal income taxes if I give the winning ticket to the charity?
No. Once you have the right to receive the income, you are subject to the tax. It is the same principle that prevents a donor from avoiding capital gain taxes by transferring property to a charitable remainder trust when the property is already subject to an agreement of sale, or from avoiding capital gain taxes when selling stock and donating the proceeds. In each of these cases you would be assigning your right to receive the income, but since you had the right before the assignment, you would be subject to federal income tax on that income.
If you donate the winnings, you could claim a charitable contribution deduction from your federal income taxes in the year of the gift, of course. But if you win a really big jackpot, your gift could exceed the amount you can deduct in the first year, and perhaps even the amount you can deduct by carrying the excess over for five years. Depending on where you reside, the winnings could be subject to state and/or local taxes as well.
Comments
OK, makes sense and IF I DONATE THE TICKET TO THE 501(C)(3) BEFORE IT IS A WINNER?
You would get a deduction for the cost of the ticket. Since you have given up all your right, title, and interest in the ticket, you would get no benefit from the fact that it is later a winner. —Don Kramer
Since all right, title and interest in the ticket have been given up to the 501(c)(3), can the 501(c)(3) receive the full-cash amount then, tax-free?
Yes. —Don Kramer
If I bought a ticket, wrote the name of the nonprofit on the signature line, and it won, would the NPO be able to collect the full amount?
Yes. —Don Kramer
So let’s say I win the MegaMillions $1.6 billion jackpot that will probably rise to $1.8 by next Tuesday. The cash payout would be $1.017 billion. In North Carolina the combined state and Federal taxes should be 45% so that leaves $559,350,000. If I then endowed a nonprofit I would set up with $200 million, does that mean I could offset $200 million of my personal earnings over the next 5 years? If you could get a 5% return on $200 million you would not have to pay taxes on $50 millions in earnings over the five years. Is that correct? It’s a real shame that any government takes such a large portion of such winnings. While you may not have earned it neither did they. They would earn more in the long run and/or more people could be helped if they let you keep and invest more of the money you win.
If you give $200 million to a charity, you are correct that you can deduct it against your income over the next five years, but you will need to earn a lot more than $200 million to realize the full savings. If you create the charity so that it is a private foundation, you can deduct your cash contribution only up to 30% of your adjusted gross income, or income totaling $666.67 million. If you give it to a public charity, you can now deduct it up to 60% of your adusted gross income, or $333.33 million. It is quite a good benefit, but not a one-for-one offset.
If the charity earns $50 million over the next five years, a public charity will earn it tax-free. A private foundation will have to pay a 2% excise tax on those earnings (with the possibility of reducing the tax to 1% annually if it continually increases its distributions over the years). (Congress has revised the private foundation excise tax on net investment income to 1.39% in all caases.)
Whether it is a "shame" to tax your lottery winnings is a matter of opinion. You will not be fully taxed if you give a big chunk of it to charity, but not everyone will follow your example. —Don Kramer
So, I presume if you treat the NPO as one of the parties in your Lottery Pool, the share designated to the charity would go to the organization tax free? Whereas, the shares won by the other parties in the pool would be taxed at whatever their federal, state, local tax rates may be.
If the nonprofit was actually a member of a Lottery Pool, it would not be taxed on the winnings and the individuals would be taxed on their winnings. I am concerned, however, about your terminology of "treating" the nonprofit as part of the Pool, which suggests that it wasn't really in before the drawing, but that the group decided afterwards to include it. If that is the case, the others in the Pool will be taxed on the winnings that are donated to the nonprofit. The nonprofit doesn't have to pay tax on either lottery winnings that it paid for or on contributions from the Pool members. But if the Pool members were entitled to the winnings when they made the nonprofit a member of the Pool, they will be taxed on the winnings and will deduct the value of the contribution as a partial offset. —Don Kramer
If a person were to win the lottery, and after winning then create a nonprofit, and after the nonprofit was approved, then sign the back of the ticket... How much would be taxed?
When the individual has the right to the winnings, i.e. after the drawing is held and the individual holds the winning ticket, the individual will be subject to tax on the income. If the individual gives the winnings, or the winnings minus anamount held to pay the tax, to a nonprofit, the nonprofit, assuming it is one of the many nonprofits (including charities) that are exempt from federal income tax, will treat the transfer as a gift and have no federal income tax to pay. --Don Kramer
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