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Let's say I won a prize with an approximate retail value of $15k (trip for two to some exotic location). Normally you'd have to pay like $6,000 or so in taxes.

But what if you have a kid who's 20, that's living at home and doesn't have any income. They're too old to be a dependant so they'd presumably have to be filing their own taxes. So what if you gave them the gift? The $15k would fall under the standard deduction and so it seems like they'd be able to claim the gift on their taxes without paying any taxes.

Is that line of reasoning correct?

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    Giving income away after you earn it doesn't excuse you from paying taxes on it... – DJohnM Dec 13 '15 at 22:25
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    Plus that's more than the gift tax exclusion so you might need to deal with that. – blm Dec 13 '15 at 22:31
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    If you give a gift to your kid (or anyone else) , it is not income to the recipient, and so "falling under the standard deduction" is meaningless as far as the recipient is concerned. Since the amount is over $14K, you have to file a gift tax return and possibly you might have to pay gift tax on the gift. And all this in addition to the income tax on the MSRP of the prize, not the retail value as you think. – Dilip Sarwate Dec 13 '15 at 22:33
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    Do you mean stating that he is the prize winner in the first place? Like giving him the winning ticket and having him claim the prize? – JTP - Apologise to Monica Dec 13 '15 at 23:16
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    @JoeTaxpayer technically, since the ticket has already won, transferring it to someone else is the same as transferring the winnings, so it doesn't really matter who claims the prize at this point. One might argue that "who'd know", but that would still be tax evasion, and someone might know and tell the IRS. – littleadv Dec 14 '15 at 4:04
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There are two ways to avoid tax on a prize:

  1. Refuse the prize completely.
  2. Follow the IRS procedures to have your prize directly sent to a charity. (If you accept the prize and then later donate to charity, you still have to report it as income.)

Neither of these gets the prize to your family, so, if that's your goal, you're stuck with the tax. If you want to avoid the tax and don't care about getting the prize (for yourself or for your kid), you have options.

As this Forbes article notes, that you have option #1 at all is a little surprising in the context of the rest of US tax law, but it is allowed. (http://www.forbes.com/sites/robertwood/2010/10/14/irs-is-taxing-my-nobel-prize/) If you want to exercise option #2, you need to carefully read the rules in IRS Pub 525 or other official places because there's a series of requirements and steps that need to be taken to make this happen legally.

  • It's not surprising at all, consider all the "I didn't know I even entered the raffle and I won a million dollars!" cases. – littleadv Dec 14 '15 at 16:27
  • @littleadv It's clear that there has to be some type of exception for the reason that you mention - but it does go against the grain of the constructive receipt rule that applies to most forms of income at the individual level. "Surprising" is in the eye of the beholder to some extent, so that choice of word is unnecessarily colorful. – user32479 Dec 14 '15 at 16:50
  • Constructive receipt doctrine is not, surprisingly, codified in the US, to the best of my knowledge. It is interpretation of the law, not the letter. – littleadv Dec 14 '15 at 16:51
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No, on the contrary. You'll be paying taxes on the income, and then again - on the gift, since the value is above the exemption limit.

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    Technically they won't pay tax again on the gift unless they exceed the lifetime max, which is over 5 million. But they would need to file a form. (And I know you know this already...) Just wanted to clarify for those that don't. – TTT Dec 14 '15 at 19:16

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