Congratulations, you've struck it rich and need directions to the state lottery office to pick up an enormous cardboard check. You might decide to buy a yacht and see the world, or you might go in the other direction and donate your winnings to charity. Of course, there's no law against giving as much as you want to whomever you choose. But if you're looking at that cash contribution as a useful tax deduction, the IRS rules on charitable gifts may cool your generosity.
Federal and state laws don't limit charitable gifts. In fact, the tax rules generally encourage them. You can deduct cash contributions to qualified charities, but you must make sure the organization is really qualified. To assist you in this task, the IRS offers EO Select Check, which is a public database of all qualified tax-exempt organizations that can receive deductible contributions. If you claim a contribution to a non-qualified charity, the IRS will deny the deduction, "adjust" the numbers on your tax return, and send you a bill.
Reporting Lottery Wins
A charitable gift from the lottery or any gambling proceeds does not allow you to escape federal taxes on your winnings. The lottery agency will report the money on Form W-2G if it's over $600 and withhold from it as well. Because of this, it's impossible to donate lottery money "tax-free" to a charity since 25 percent of the cash has already been forwarded to the IRS and you must report the entire award as income on your tax return.
The 50 Percent Rule
You report charitable gifts as an itemized deduction on Schedule A of Form 1040, along with other deductions. The IRS rules state that charitable donations are limited to 50 percent of your adjusted gross income "without regard to net operating loss carrybacks." This means if you subtract a business loss from the AGI on an amended return, you can add the loss back to your AGI for purposes of figuring your charitable deduction limit. Any amount over the 50 percent limit is not deductible, although it's still legal and unlimited. The charity won't pay taxes on your contribution. By IRS definition, a charity is a tax-exempt organization.
If you're considering a contribution to certain other types of tax-exempt organizations, consider another important set of IRS limits -- 30 percent of your adjusted gross income on gifts to veterans organizations, fraternal societies, cemetery organizations and certain private foundations. Also, if you've won a non-cash prize, such as a car or a house, you can deduct the "fair market value" of that prize if you gift it. But again, you are subject to the 50/30 percent limits.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.