Buying Lottery Ticket Isn’t Charity

QUESTION: Since one-third of the price of every $1 California lottery ticket sold is contributed to the state’s education fund, am I entitled to write off as a charitable contribution 33 cents of every dollar I spend in the lottery?--R. H.

ANSWER: State and federal tax authorities say they wish they had a dollar for each time they have responded to that same question in the last couple of months. Their answer to that very common question: No.

There is nothing wrong with your reasoning. It’s your intent that disqualifies the expense as a tax deduction. You and everyone else who plays the lottery spend a buck hoping to win a fortune. No one buys a lottery ticket because he or she wants to donate money to the schools.

So, neither the IRS nor the state Franchise Tax Board will allow such a write-off--on grounds that you didn’t have “donative intent.”

Your dollars may not be entirely wasted, however. If you win, you are allowed to write off your expenses up to the amount of your winnings. So, if you win $100 this year and bought $150 worth of tickets, you are allowed a $100 tax deduction.

California lottery winnings are exempt from state taxes, but they are subject to federal taxation. The lottery reports winnings of $600 or more to the IRS and withholds taxes from winnings of $5,000 or more.

And if you never win? You’re a double loser. You have no winnings and no tax deduction for all of those dollars you threw away.

One other suggestion: As long as you’re spending the money, keep your tickets. You’ll need them as proof of your out-of-pocket costs in the event that you win and claim a deduction.

Q: I recently obtained a table that shows which taxable yields are equivalent to tax-exempt yields under various tax brackets. It got me to thinking about how one arrives at these brackets and what it really means, for example, to be in a 32% tax bracket.--S. A.

A: A tax bracket is simply the top federal income tax rate that a taxpayer must pay. It is based on taxable income, which is the difference between your gross income and your total allowances for deductions and exemptions.

The tax bracket is an outgrowth of the U.S. government’s longstanding philosophy that, as one’s income increases, so should the rate at which that income is taxed. Hence, as your income increases, only the amount that falls into a higher bracket is taxed at a higher rate.

The income ranges, or brackets, and the rate applied to those ranges are set by Congress. To determine yours, obtain a current federal income tax schedule--there is one in the instruction booklet that comes with your tax forms every year--and find the taxable income range that applies to you. The percentage that appears next to that range is your incremental tax rate--that is, your tax bracket.

Say you file a joint return and your joint income is $50,000. That figure currently falls in the income bracket that Congress set at $49,980 to $65,480. Income at that level is taxed at a rate of 38%, so you are said to be in the 38% tax bracket. That doesn’t mean all $50,000 of your income is taxed that high. Only the $20 over $49,980 is taxed at 38%; the rest is taxed at progressively smaller rates. In fact, your income goes through nine brackets (that is, nine progressively higher rates of taxation; the first $3,709 of a married couple’s income is exempt from taxation) before it gets to the 38% bracket.

The tax reform proposals making their way through Congress now would retain the progressive rate concept but squeeze the number of brackets to three from the current 14. The range of tax rates would narrow to 15% to 35% from the current 11% to 50%.

Another way of measuring tax rates is to divide your total tax liability to federal, state and local governments by your gross income. That is called your effective tax rate.

Your tax bracket is by far the more valuable figure, however. It is a critical factor in determining such things as whether it would pay you to invest in tax-free investments instead of taxable ones. It also proves handy when you’re being offered a raise or a new job and you want to determine whether the extra salary pushes you into a higher tax bracket.