What kind of taxes will you have to pay for winning money on a game show or a lottery?
The short answer to this question is that it depends on your state, and how much you’ve won. If you win money on a game show you do have to pay income tax on the winnings. On your tax return you would file game show winnings under Miscellaneous Income. You will also receive a 1099 tax form from the entity that awarded you the cash prize. For example, under the rules section of Who Wants To Be A Millionaire, it explains a contestant will receive a 1099 form to declare taxable winnings on prizes valued at $600 or more. That doesn’t mean that if you win less than $600 you are exempt from declaring it on your tax return. It simply means that they may not send you a 1099, but according to the IRS even winnings as low as $50 must be declared as taxable income.
How much you have to pay depends on certain factors. One is whether or not your state charges an income tax. Seven states don’t charge income tax, so if you win a game show while living in one of those states, you’ll be in better shape. Second, what tax bracket will you fall into after winning your money? If you win a game show, you might make a considerably higher amount than your annual salary. This new injection of cash could then put you in a higher tax bracket.
Let’s say you won $25 million in the lottery in New York City. City and state taxes add up to 12.7% (rounded up to the nearest tenth). Add 25% for Federal taxes, which comes to 37.7% or $9.4 million that you will have to pay in taxes. This is also true for winnings from a game show. The only difference with the lottery, again, comes down to the state. Certain states do not tax you for lottery winnings, such as California. If you live there you can expect to only pay Federal taxes. So there you would only pay 25%, or $6.25 million in taxes.
What if I won a vacation or a car instead of money?
Winning prizes on a game show is anything but free. Prizes have a monetary value attached to them that will be considered by the IRS. Say you win an all expense paid trip to Mexico. There will be a prize value attached to that trip, the same as a car or a TV. If the prize value attached to the trip is $10,000, then you will be expected to declare $10,000 to the IRS and pay applicable taxes on it. When you win prizes that are not actual money, it’s important to know exactly what the monetary value of the prize you are receiving is.
If you win a prize that isn’t money, you can end up owing more in taxes than you can afford. This can become a serious headache, because if you accept the prize and you can’t afford to pay the taxes on it, you could face serious penalties. You may decide to sell the item, pay the taxes you owe for it, and then keep the rest of the money as profit. Sure, that’s possible, but it’s not definite that you will be able to do this. Especially at a price that makes it worthwhile for the time you might have to spend selling it.
How do you get around paying taxes on these winnings?
One way to avoid owing large amounts of money to the government is by gifting all or a certain amount of a prize, and claiming the exemption on your tax return. The IRS provides a comprehensive guide with clear examples on their website of how much money you can exclude on your taxes. Remember that the person giving the gift is always responsible for paying the taxes on the gift. Speaking of the gift tax, you may be saying to yourself: “But isn’t winning a prize like I’m getting a gift? Meaning it would be tax exempt?” Nope, in the eyes of the IRS, winning a prize is like getting a payment. You are being paid to compete on a game show, and what you win becomes income for your time and services. If you want to give away prize money as a gift, you can make gifts of up to $13,000 to as many people as you want without having to pay gift taxes on it.
Does it make a difference if you win a prize without entering a contest?
Remember when Oprah gave everybody a new car? None of them entered in a contest or signed up to win a prize, but guess what? They all still had to pay taxes on it. Even if you didn’t sign up to win, you are still liable for the taxes owed on any prize you receive, no matter what. In certain cases, as with the Oprah show, the company giving away the prize (in this case Pontiac) will agree to pay a good amount of the fees that come with the prize, but that doesn’t mean they will cover all of it, or even half, of what you could end up owing.
Are prizes taxed differently than gambling?
In some ways, prizes and gambling are taxed similarly. Both are miscellaneous income that you must report to the IRS. Gambling has plenty of strange rules governing its taxation. Some of those differences may work in your favor when declaring taxes. When it comes to the lottery (and, yes, the lottery is gambling) there are states that don’t impose a tax on your winnings, as mentioned above.
For the lottery or most casino gambling, you can deduct your losses. Nice, right? Of course, there are stipulations to this. You can only deduct your losses if you actually end up winning eventually, and your winning amount must be more than your losses. So if you’ve spent $300 in lottery tickets and win $3,000 dollars, only $2,700 will be considered taxable income. You also have to itemize all these losses (and winnings). This means keeping every lottery ticket, or every receipts from what you spent at a casino.
How to keep your head above water after winning a prize
First and foremost, always pay the applicable taxes on any prize you win. It’s best to pay estimated taxes right away on what you win to avoid any possible penalties, or just spending all the money.
If you can, always take the money for a prize. If you win a vacation valued at $15,000 dollars, ask if you can just have the $15,000 instead. That’s because you’ll end up owing close to $6,000 in taxes (in New York state). That’s a lot to pay for a supposedly “free” vacation. You’d be better off taking the money, and then using it to pay for a smaller, more affordable trip.
Like I mentioned earlier, it is extremely important to know the exact value of your prize. The entity giving you the prize is also most likely slightly inflating the value, not only to entice more people to compete, but also because it’s a tax deduction for them. That same $15,000 vacation may not really be that expensive. Keep track of your receipts and expenditures, so you can contest the company’s valuation, if necessary.
Lastly, sometimes it’s good idea to just turn down a prize if it’s not money, and if it has the possibility of becoming a tax burden. Winning money’s not so bad, because you can always cover the taxes out it with your winnings, unless you blow it all before your taxes are due (don’t do that!). Objects or vacations, on the other hand, may not always be worth the trouble. Taking the example of the Pontiac G6 that Oprah gave every member of her audience. The manufacturer’s suggested retail price ($21,265) with only a 25% Federal income tax imposed means you would owe $5,318.25 in taxes. The car’s nice, but don’t you already own one? Are you financially able to set aside $5,000 to pay the taxes you owe on that sweet prize? Maybe you can sell it and come out even better, but it’s important to be realistic with yourself and not let the glitter of a fantastic prize blind you to what lays down the road. Sometimes you should just say “no thank you” and walk away.
…Or you can gift it to me.
Winning money image via Shutterstock