12

Can pretax lottery winnings be donated to charity in the US simultaneously creating a deduction of the taxable lottery winnings and putting pretax proceeds to a productive cause?

  • 1
    @JoeTaxpayer no, it wouldn't. – CQM Jun 16 '15 at 17:46
  • 7
    If you find yourself in this situation, seek professional help before doing anything. (You can afford it.) – Ben Miller Jun 16 '15 at 17:56
  • 1
    since you have all these upvotes, @BenMiller I want to point out the people in the court case did seek professional help, and still would up in tax court and lost. They would have been exposed to more perspectives asking strangers on the internet than solely trusting their lawyers and accountants. Interesting form of altruism. – CQM Jun 16 '15 at 19:35
  • 1
    @CQM Perhaps, but the fact that we can point to that court case now is hindsight. Hopefully, a professional this year won't make that mistake again. – Ben Miller Jun 16 '15 at 20:09
  • 4
    @CQM True story. Luckily, with your lottery winnings, you can afford several legal opinions. – Ben Miller Jun 16 '15 at 20:24
10

The lottery commission will withhold tax, typically, 25% federal. For large sums, the millions people dream of winning, the problem lies in that you can't deduct more than 50% of MAGI as a charitable deduction. So, the year you win, say, $4M, you can donate $2M, and keep $2M but have a tax bill on that $2M.

  • Instead of having a tax bill on the $4M. So this is an advantage, and the charity enjoys excess liquidity. In this example, it seems most optimal to donate $500,000 to charity, and retaining the 3,500,000 for the tax bill. – CQM Jun 16 '15 at 17:51
  • 4
    Yes. The issue, as I see it, is the 50% limit. Say the federales didn't withhold any tax at all. You donate $4M and then learn of the 50% rule. You owe tax on $2M, over $500K. Ouch. – JoeTaxpayer Jun 16 '15 at 17:56
  • I see, thanks. My question was about the ability to use any of the pretax cut at all, not the limitations of or the presupposition of using 100% of the pretax amount. But your information has been insightful – CQM Jun 16 '15 at 18:17
  • @JoeTaxpayer Or suppose you won $200M in Powerball... didn't know about the 50% rule, donate $180M to charity, keep $20M for yourself, invest it wisely, then suddenly owe tax on $100M... over $25M, which you perhaps will never be able to repay even after liquidating what you kept. – Michael Dec 15 '15 at 3:05
  • 1
    Well, Michael, the good news is that there's an automatic high (25%) withholding. It will cover the half you have to pay tax on, and then some. On your $200M, you clear $150M, donate it all, you still owe the tax on $100M, but already had $50M paid in. You get some back when you file. If you take a lump sum, your best choice is to donate half of that, then half the earnings each year. – JoeTaxpayer Dec 15 '15 at 13:52

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.