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I won dinner at charitable lottery. Isn't that great?

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I won dinner at charitable lottery. Isn't that great?

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?

Monday, January 1, 2007

Comments

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

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

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