By Barry Dolowich
Tax Tips
Q: I recently won a trip valued at $3,800 from my church raffle and have been told by many that I will owe tax on my prize. Do I really have to pay taxes on my prize?
A: Generally, prizes you win from sweepstakes, raffles and contests are taxable as ordinary income. Prizes other than cash (car, cruise, etc.) are valued at their fair market value. The total cash and fair market value of other-than-cash prizes are reported to the Internal Revenue Service via Form 1099-MISC. This income must be reported on your Form 1040 as “Other Income.”
Your incidental entry expenses (postage, envelopes, travel, etc.) are not deductible. The rules for prize winnings should not be confused with those for gambling. Gambling losses are deductible to the extent of gambling winnings. However, sweepstakes entry postage expenses do not qualify as a gambling loss and prize winnings are not the same as gambling winnings.
It is common for game show contestants and other prize winners to find themselves with severe tax problems. Oftentimes, winners do not have the cash to pay their taxes. Imagine winning $100,000 worth of prizes (perhaps a car, a cruise around the world, a television, and much more) and being told you owe $35,000 in federal and state income taxes on April 15 by your accountant. Ouch!
I remember hearing a story of a “lucky” winner of a very expensive luxury car. He won the car in January and was not liable for the income tax until April 15 of the following year, approximately 15 months later. As the tax day of reckoning was approaching, he realized he had to sell the car to pay the taxes. However, the car had depreciated so much in value at this point, that he was forced to sell it for an amount slightly less than the tax liability created by winning the car in the first place. Needless to say, he was not a happy camper. At least he had the experience of driving the luxury car for 15 months!
Many game shows and prize promotion companies offer their winners the option of accepting a discounted amount in cash to alleviate the tax burden created by their winnings. I recommend that you contact your tax advisor to immediately to start planning!
Barry Dolowich is a certified public accountant in Monterey. He can be reached at 831-372-7200, P.O. Box 710, Monterey 93942-0710 or bdolowich@gmail.com.
