Suppose I purchase a lottery ticket today (Dec 14, 2015) and win $25K. If I wait a few weeks and redeem the ticket after Jan 1, are the taxes due based on income in this year (2015) or next year (2016)? Perhaps the answer is simply when the money is received, regardless of ticket or redemption date? Could the answer vary for Fed vs State?
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3 Answers
It depends on when you can get the money, not when you know that you won or when you choose to take the ticket in. If you can present your ticket this year and get paid this year, the taxes are due this year, whether or not you actually choose to claim the prize this year. If you cannot receive payment until next year, then taxes will be due next year. This is "constructive receipt," which applies to most individual tax situations.
This assumes that you chose to receive a lump sum. If you get installments, then your taxes would be due as the installments are available, but the constructive receipt still applies.
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3Ah, just read up on "constructive receipt". Appears to both make sense and be crazy at the same time for the lotto case. One would expect that if it is reported in one year, that would be the year it would be paid. Alas it is not. >.<– BlakePDec 14, 2015 at 20:44
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3@Brick. Interesting. So how is "can" determined? If I misplaced the ticket until next year, or was out of the country on vacation, (or fill in your favorite excuse), does that mean I still could have gotten the money?– TTTDec 14, 2015 at 21:07
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2If the only thing preventing you from using the money is a voluntary action on your part then you have constructive receipt. The definition is kind of long for a comment, but you can easily find it by searching for "constructive receipt." There's also court cases specifically on the subject of lottery winners, so the functional definition has been challenged. When you win, you can afford to pay lawyers to fight for the definition that you want. :)– user32479Dec 14, 2015 at 21:11
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paying lawyers is not what I had in mind to do with my lottery winnings!– user12515Dec 15, 2015 at 2:58
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I just did a little research on constructive receipt and came across this gem of an article: bizer.com/lottery. Seems like he may have an ax to grind, but there is quite a bit of good information, and leads me to believe that @Brick is probably right regarding finding a lawyer to defend either side. Though according to him the courts have currently always ruled that the money is taxable when received.– TTTDec 15, 2015 at 3:38
The tax year will be determined by the date on the check from Lottery and they will withhold estimated taxes for federal, and for most state, incomes taxes.
Just remember if the ticket is claimed in January, then you will have to wait until the following year to get any possible refund.
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This is incorrect. If the drawing took place in 2015 and there was enough time for the OP to submit the lottery ticket in 2015 for verification and payout, then delaying submitting the ticket for verification till 2016 does not convert the winnings into 2016 income. There was an extensive discussion of this matter on the Usenet group misc.taxes.moderated (now available on groups.google.com) some years ago. Lots depends on the exact facts, e.g. what if the Lottery office is closed on Saturday Dec 31 when the lottery results were announced on the 6 pm news on Friday 30th. Dec 14, 2015 at 21:05
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@Dilip, I think the jury is still out on whether or not this answer is correct. (See my comments to Brick's answer.) Regardless, the last sentence makes a good point, since large winnings typically have taxes withheld, if you are expecting a refund you may wish to choose to go out of your way to attempt to get the money in the current tax year.– TTTDec 15, 2015 at 3:55
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1The jury may still be out but for a lottery ticket bought on December 14 (presumably with the winners announced within the next few days), wait for a few weeks and redeem the ticket after January 1 as the OP says is definitely deliberately delaying receipt of winnings, and not going to pass muster. Note also that it is the Tax Court judge who makes the decision, not a jury, and so is unlikely to be swayed by weepy tales of "my kids were sick and the dog died and my wife left me, and so I couldn't submit my ticket till after January 1. Dec 15, 2015 at 4:13
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@DilipSarwate - Haha! I think you're right if the winner is upfront about the delay. But realistically if someone did this they would not admit it, and it would be difficult to disprove that they simply didn't realize they had won until weeks later. Furthermore, if the article I sited in the other answer's comment is correct, there are 4 cases of people wanting constructive receipt to mean the year they won (I'm guessing because they were expecting refunds), but the IRS wanted constructive receipt to mean the year they received the money, and the courts sided with the IRS.– TTTDec 15, 2015 at 4:23
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1To followup on my last comment, maybe the lesson here is simply: Regardless of what you choose to do, the IRS gets to decide if they agree with your choice, and if they disagree, the courts will probably side with the IRS rather than you.– TTTDec 15, 2015 at 4:33
Winnings are taxed in the year you receive payment. Period. Constructive requires an unqualified right to receive immediate payment. One qualification is that lottery tickets must be verified. Large winners usually have to wait a day or two, which voids the "immediate payment" clause. Here's an extreme example: If you don't cash the ticket until July after you've already filed your income taxes, is the state going to issue a retroactive W2G? That's kinda hard when the IRS requires that tax reporting be received by January 31st. Which year do you get to deduct the state income taxes paid/withheld?
Benton
