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I have a lottery ticket that is a very large amount. I want…

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I have a lottery...

I have a lottery ticket that is a very large amount. I want to start a charity and give it all to this charity. How can I do this so as not to pay income taxes?

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

I was thinking if I start a non-profit corporation and have the non-profit cash in the lottery ticket, since the are tax exempt, the non-profit would not have to pay taxes on it.

Accountant's Assistant: When we are ready I'll take you to the appropriate web page.

I was worried that because I really bought the ticket, would they force me to pay the taxes.

Accountant's Assistant: When we are ready I'll take you to the appropriate web page.

Would this be considered Unrelated Business Income?

Accountant's Assistant: Is there anything else important you think the Accountant should know?

That is it,

Submitted: 6 months ago.Category: Tax
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1/6/2018
Tax Professional: emc011075, Tax adviser replied 6 months ago
emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3,873
Experience: IRS licensed Enrolled Agent and tax instructor
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Hi. My name is ***** ***** I will be happy to help you.

You can just give the ticket to a charity of your choice and let the charity cash it. It doesn't matter who bought the ticket, as long as you do not cash it, you will not have to pay any income tax.

To create a nonprofit organization takes time. You will have to create a corporation and than apply for tax exempt status from the IRS. Nonprofit does not automatically means tax exempt (does not pay any income tax) To qualify as nonprofit tax exempt organization, the organization must be created for public benefit and have one of the following purposes: religious, scientific, charitable, educational, literary, public safety or cruelty prevention.

Since you have limited time to cash the ticket you may not have enough time to create create an nonprofit organization and receive the tax exempt status before you will have to cash the ticket.

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Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 6 months ago
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,137
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Hi! Different expert here.

The prior expert was correct, but there is more than you need to know.

First of all, she is correct in that it takes time to form a nonprofit charity. The incorporation part can be done in a day, which is not bad. The IRS now has a streamlined method to get tax-exempt status by filing a Form 1023-EZ, but this still takes time.

However, the biggest thing that will stop you are the deduction rules on Schedule A. IF you cash the ticket, the winnings are income to you. If you were to get your charity up and running before the end of the year, you still could not avoid paying tax on the winnings by contributing the ticket to your charity. The reason is because deductions to charity are limited to 50% of your adjusted gross income. This means that if you won $200,000 and had no other income, you would report the full $200,000 as income, and your deduction to charity on Schedule A would be limited to 50% of AGI, or $100,000. This would leave you with $100,000 to still pay tax on.

The only way that you would avoid this would be if your other income - wages, dividends, gains, pensions, etc - were equal or more than the amount of your lottery winnings. In this way, your normal income would allow more of a deduction. For example, if you won the same $200,000, and you had wages of $250,000, your charitable contribution deduction would be limited to $225,000 (50% of $200,000 + $250,000). So you could contribute the full $200,000 and in effect avoid paying tax on it.

Also, this large of a charitable contribution could put you in Alternative Minimum Tax. In AMT, deductions that you would normally have, such as state and local income taxes, property taxes, employee business expense, investment expenses, and other expenses, are not deductible. So by deducting the contribution, you may end up paying more tax due to AMT.

The best way to avoid this is to have the charity cash the ticket. Then it never hits your income at all, and you do not have to worry about any contribution limitations.

Let me know if anything is not clear, or if you have any more questions.

Thanks! Have a great weekend!

Roger

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Customer reply replied 6 months ago
What if the charity is audited? They will want to how the charity got the ticket. If we say I donated the ticket to the charity. Will they consider the ticket as valued at $2 or the winning amount. Because by the time I donate it, I would have know he ticket's value increased.
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 6 months ago

This will depend on whether you cash the ticket in and give the cash to the charity or just give the ticket to the charity.

If you cash the ticket in and pick up the income, you will get a deduction for the full amount that you gave the charity. When you donate an item to a qualified charity, you get a deduction for the fair market value of the item, not its cost. For example, I had a client donate $25,000 worth of a mutual fund he owned for over 20 years. He donated it to his church, a charitable organization. Even though his cost basis was only $10,000+/-, he got a deduction for the full value of the fund at the end of the day that he donated it.

In this case, you gave the $200,000 cash to the charity. Your basis in the cash is $200,000, as you paid income tax on the winnings.

If you gave the ticket to the charity, and they cashed it, you would only get a $2 deduction, and the charity would not pay tax on the donation income, as this is tax exempt to them.

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Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 6 months ago

With everything in taxes, there is a balance. When you get a payroll check, you pick up income, and your employer gets a deduction. It balances.

If you donate something to a charity, say a car, you paid cash for the car, and you then get a deduction for the FMV when you give it away.

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Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 6 months ago

Here is a good article from Forbes on donating lottery winnings:

https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/robertwood/2012/11/28/one-more-thing-to-do-when-you-win-the-lottery/&refURL=https://www.google.com/&referrer=https://www.google.com/

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Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 6 months ago

I have not heard back from you. Do yo have any more questions?

If not, please don't forget to rate me, as that is how questions are closed.

Thanks so much! Have a great week!

Roger

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