Taxpayer asks:
I have a difficult situation. I won a lot of money in my church’s 50/50. I know I have to report it as income but when I asked for written information from my church, they asked me not to report it. They say they aren’t legally allowed to run a 50/50 and if I report it, I’ll get them in trouble and they could have to close. I don’t want to get anyone in trouble but I don’t want to cheat on my taxes. What do I do?
Taxgirl says:
You’re absolutely right that you need to report the income. So good on you.
As to the church, this kind of thing happens all of the time. Many organizations are barred by state law from conducting “games of chance” and other random lottery type fundraisers. And the 50/50 is just that: everyone pays into a pot and a random winner takes 50% and the church or other organization takes the remainder. It’s a win-win for the church or other organization because it requires no upfront cash, no real efforts beyond promotion. There’s just that little detail of whether it’s allowable…
The good news in your case is that you don’t have to have a form from the church in order to report the income. Just report it on Line 21 as other income. The IRS asks you to describe the type and amount – it doesn’t actually require you to name the source.
All of that said, it’s not beyond the realm of possibility that you could be asked, at audit, to provide the source of the funds. In that event, do it. The church is clearly aware that what they’re doing is wrong and they’ve made the decision to do it anyway. That’s not on you, it’s on them: any of the fall out resulting from the 50/50 is the result of their calculated risk. And so long as it’s working for them, they’ve decided to keep doing it. Again, not your problem.
So go, enjoy your winnings. Don’t waste another moment worrying about it.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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When New Jersey Governor Corzine and the legislature were scrambling to find ways to fill the holes in their budget, it was clear that they wanted to utilize “sin” or “vice” taxes as much as possible. Unlike income taxes which affect everyone, sin taxes only affect people who engage in certain behaviors. The behaviors considered “sinful” vary from state to state but generally include drinking and smoking. New Jersey, however, added another vice to the list: gambling.
Yes, gambling. But not the Atlantic City quarter slots kind of gambling (yes, I said quarter slots can you tell that I’m not a risk taker?).
A more sinful, sinister kind of gambling: playing the lottery.
Beginning in 2009, New Jersey will begin taxing lottery winnings – something the state has never done before – at a maximum rate of almost 11%. I know what you’re thinking: “taxgirl, beginning in 2009? Aren’t you a little late to the party? It’s July.”
Yes, I know it’s July. The law took effect July 1 but lottery winners are taxed on the winnings retroactively to January 1. That has some lottery winners furious.
But players dollar scratch cards can relax a little: only prizes of more than $10,000 will be affected. Tax rates will begin at 1.4% and increase to 10.8% depending on the amount of winnings. Other tax provisions based on filing status, etc., will apply.
While lottery winners are outraged over the new law, including recent winners of the Mega Millions jackpot, the state is fairly confident that the law will stay “as is.” The reality is that lottery winners make up a small percentage of the state’s voters taxpayers and it’s not a cause that many citizens will rally around. The state is betting (pun completely intended) that a tax increase on the beneficiaries of what’s considered a stroke of luck will not earn much sympathy from taxpayers who are already concerned about their own tax burdens.
What do you think? Fair or no?
Uncle Sam A lucky winner in Indiana just made some serious dough. Powerball lottery officials say just one winning ticket was sold for Saturday night’s $314 million jackpot. The six Powerball numbers are: 2, 8, 23, 29 and 35, with a Powerball of 19. [Editor's note, as per usual, I would not have chosen any of those numbers, which is why I remain lottery/daily pick/whatever "win free".]
That’s a whole lot of cash. Chances are, the winner will opt for a lump sum pay-out rather than the annuity; that tends to be the most popular option. Lump sum payments can range from between 1/3 and 1/2 of the gross winnings.
Armchair investors always champion for the lump sum amounts because they estimate that they can make more money investing the money than the lottery folks can. Maybe. With the annuity option, the lottery officials will invest the amount, pre-tax, and pay out principal and earned interest over a period of time (usually 30 years). The lump sum option requires the payment of taxes upfront before a pay-out (withholding is required, usually at the highest tax bracket) – therefore the initial amount to invest will be lower than the post-tax annuity investment. Of course, if you invest the money at a much higher rate than the lottery officials, you win. If not, you lose.
Brad Duke is one of the success stories. He won a $220 million Powerball and opted for the lump sum payment. After taxes, his lump sum payment was worth $85 million. Prior to claiming his winnings, he hired a team to help him, including a financial investor, a lawyer and a publicist. He came up with a plan to parlay the $85 million into $1 billion and went to work. He didn’t go crazy with the spending. He didn’t put all of his eggs in one basket. Today, he’s on his way to being a billionaire – all while in his 30s.
But, just getting advice isn’t always a guarantee. Consider Andrew Cicero. He won $5.5 million in 1995. Cicero initially took his prize as annuity, which was required under state law. He was to receive 25 annual payments beginning at $98,000/year and increasing each year as the investment grew. Five years later, an investment firm convinced him to sell the future payments in exchange for a lump sum ($2 million) that he could invest at a much higher rate. But it didn’t work out that way. It was the year 2000. And Cicero’s investors at SmithBarney put almost 100% into stocks – heavy on tech. He lost about a third of his winnings, he claims. And he owed the IRS almost a quarter million dollars more in penalties and interest; he believed that the lump-sum buyout could be taxed as capital gains (not so). His is just one of many sob stories based on bad advice and bad luck.
Hopefully, that Indiana winner is out there, quietly assembling his or her team, who will think the entire process through. If they’re smart, those folks will consider not only the long-term financial implications but the short-term tax consequences of winning the jackpot. And they’ll give practical, well thought out advice.
If it’s not you – if you missed out on the Powerball, take heart. The Mega Millions prize will be worth about $250 million – and the drawing is tomorrow! If you won, what would you do with your millions? Annuity or lump sum? And what would you spend/invest the money on?
