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Lottery trust tax

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LynnAJ

New member
Massachusetts

I won a lottery prize last year.... not life-changing millions but just enough to attract trouble from relatives, so I had a trust claim it anonymously.

The trust has already paid state and federal taxes, and I have a copy of their W-2G form.
  1. Do I need to report this as income on my 1040 (or Massachusetts line 8)?
  2. Is my regular salary taxed in a higher bracket this year?
  3. Does IRS want my W-2G form? What about Form 945 "Annual Return of Withheld Federal Income Tax"?
Thank you for helping if you can.
 


xylene

Senior Member
How many millions do you need to change your life?

File an extension and consult a tax pro. You had the sense to go the trust route.
 

Taxing Matters

Overtaxed Member
Massachusetts

I won a lottery prize last year.... not life-changing millions but just enough to attract trouble from relatives, so I had a trust claim it anonymously.

The trust has already paid state and federal taxes, and I have a copy of their W-2G form.
  1. Do I need to report this as income on my 1040 (or Massachusetts line 8)?
  2. Is my regular salary taxed in a higher bracket this year?
  3. Does IRS want my W-2G form? What about Form 945 "Annual Return of Withheld Federal Income Tax"?
Thank you for helping if you can.
You were the winner of the lottery, not the trust. So it really should have been you to include the lottery winnings on your return. Was the trust you set up a grantor trust under the Internal Revenue Code (IRC) and did the trust distribute the funds to you during the year?
 

LynnAJ

New member
You were the winner of the lottery, not the trust. So it really should have been you to include the lottery winnings on your return. Was the trust you set up a grantor trust under the Internal Revenue Code (IRC) and did the trust distribute the funds to you during the year?
A lawyer signed the ticket, so I think in Massachusetts he really won (or the trust won).
A lump sum was awarded to the trust (minus all taxes), then that amount was sent to me (minus lawyer's fee).
My name is nowhere on the W-2G form, I just have a copy of it.
 

Taxing Matters

Overtaxed Member
A lawyer signed the ticket, so I think in Massachusetts he really won (or the trust won).
A lump sum was awarded to the trust (minus all taxes), then that amount was sent to me (minus lawyer's fee).
My name is nowhere on the W-2G form, I just have a copy of it.
While the lottery commission paid the trust, you are the one with the income from the lottery. You bought the ticket and held the ticket at the time it was determined to be a winner. At that point, you had income in the amount of the winnings and held a ticket worth that amount. So when you created the trust, you transferred to it an asset worth the amount of the winnings, which it then exchanged for cash in the same amount. Under tax law then, you have the income, not the trust.

If the trust you set up was a grantor trust then the result would be exactly the same even if the trust had been the one to get the income because grantor trusts are ignored under the IRC and you would be considered the owner of the trust's assets.

If it was not a grantor trust and the trust distributed all the cash to you in the same year then the trust income flows up to you and on to your return anyway. You generally don't want the trust to pay the tax; the tax rate schedules for trusts are significantly higher than for individuals.

So in this instance it works out the same regardless — the income will end up on your return. But to report it correctly, you should report the lottery winnings as directly being your income rather than as income from the trust.
 

LdiJ

Senior Member
While the lottery commission paid the trust, you are the one with the income from the lottery. You bought the ticket and held the ticket at the time it was determined to be a winner. At that point, you had income in the amount of the winnings and held a ticket worth that amount. So when you created the trust, you transferred to it an asset worth the amount of the winnings, which it then exchanged for cash in the same amount. Under tax law then, you have the income, not the trust.

If the trust you set up was a grantor trust then the result would be exactly the same even if the trust had been the one to get the income because grantor trusts are ignored under the IRC and you would be considered the owner of the trust's assets.

If it was not a grantor trust and the trust distributed all the cash to you in the same year then the trust income flows up to you and on to your return anyway. You generally don't want the trust to pay the tax; the tax rate schedules for trusts are significantly higher than for individuals.

So in this instance it works out the same regardless — the income will end up on your return. But to report it correctly, you should report the lottery winnings as directly being your income rather than as income from the trust.
I think that you might be misunderstanding what happened.

The OP stated that the lawyer for the trust signed the lottery ticket and took possession of the funds on the behalf of the trust. The OP also stated that the trust paid the taxes, which I really think that means that the trust allowed taxes to be withheld.

Somehow the withholding is going to have to be dealt with.
 

LdiJ

Senior Member
In that case the trust is going to claim the withholding on its return and get a refund for that. The OP will end up paying the tax on his/her return.
That would mean passing through the income then to the OP, and distributing the refund of the withholding to the OP to cover the tax.
 

Taxing Matters

Overtaxed Member
That would mean passing through the income then to the OP, and distributing the refund of the withholding to the OP to cover the tax.
I take the position that the income was the OP's and not the income of the trust given the facts stated. The same is true if it was a grantor trust (and we don't yet know the details of the trust). But even if it was income of a non grantor trust the OP has said that the money was distributed from the trust during the tax year, less the withheld tax and lawyer's fee, so that amount is clearly income to the OP anyway as that distribution passes the income to the OP.
 

LynnAJ

New member
I think this is my answer:

Grantor trust.

Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse.​


Someone told me this but I still wasn't sure.

I should mention the lawyer does take your social security # to run background-check. The state garnishes for most forms of debt (child support, judgements, liens, etc etc). I think that's just to avoid criminal situations, or otherwise he would be money-laundering or something.
 
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