I just won a gourmet dinner for 12 in a charitable lottery. It will be prepared personally by a world famous chef in his own home. The charity says it’s worth $13,000. Isn’t that great?
That depends on how much you are willing to pay to host your friends. The charity is required to file a Form W-2G with the IRS to report a lottery prize of more than $600, and you get to pay income tax on the value — less the cost of the ticket, of course. In your 35% tax bracket, that’s more than $4500. Is that great?
Comments
If the winner was the successful bidder of this prize at a charitable organization's auction, would the tax consequence be the same? --C.Z. via e-mail
No. And neither would the economic consequence.
The “winner” would have to pay the $12,000 bid amount, and thus be out of pocket the entire $12,000 value and not just the income tax on the winnings. The donor would not get a charitable contribution deduction because the purchase price would be the same as the value of the dinner, and a contribution deduction is permitted only to the extent that donor/payor pays more than the value of the goods or services purchased. Therefore the dinner would “cost” the donor $12,000 instead of just the tax on the $12,000 value.
If the winner paid only $10,000 for the purchase, it would be like buying it on sale. There would be no tax consequence. If the winner bid $14,000, the winner could deduct a contribution of $2000, which would be the excess over what was paid compared to the fair market value of the goods or services received in return. --Don Kramer
I'd add that the charity probably doesn't understand the tax implications and might be persuaded to lower the value to what the caterer would actually charge. M.P. - Boston, MA