And as for Frylock’s question about paying someone’s taxes, the situation is explained in this Slate magazine article (basically, it’s a converging series).
I think that’s what we told her, to donate it or something.
The word “fair market value” to the IRS is one thing. What you can actually sell something for is quite another. Our offer wasn’t the “fair market value.” Jewelry appraisers get into this all the time.
So it looks like the way they handle it is as according to the second scenario I laid out.
But I pointed out there’s a problem with this. At the end of the day, the prize package is apparently worth 22,222.22, after the series converges. Except, if you’re supposed to pay the tax on whatever the total package is worth, then an additional 2,222.22 ought to be paid on this amount!
The logic that says “you must pay tax on the tax money given to you” I think leads necessarily to a diverging series. The converging series only happens if we arbitrarily stop applying the rule at some point.
-FrL-
One of my high school teachers was on the Price is Right and he showed the video to each class. He won a hovercraft listed at $13,000 I think, street value $8,000, and he sold it in the parking lot for $5,000 because he had no use for it. He had to fight with the IRS who wanted to tax him on the full $13,000 list price.
He won but I don’t remember how far he got it down.
The funny thing is apparently while they were showing the prize he asked Bob Barker what he was going to do with a hovercraft since he lives in [state redacted] nowhere near any water. They come back and Barker says “[name] was just telling me he lives right on the water in [state].”
A recent real-life example: Contest Winner Declines ‘Free’ Airline Tickets
There’s an archived story at the WSJ site, but I can’t get to it.
The full version of that WSJ article is available here and it has this to say about the problem of over-valued prizes: “Contest winners do have alternatives, according to tax experts. Those who don’t agree with the way a company has valued a prize can submit an alternative price with their tax returns, says Martin Nissenbaum, the national director of personal income tax planning for Ernst & Young LLP in New York.” The article suggests providing an expert opinion of the valuation.
A basic misconception there. You don’t need to pay tax on $24,200 because you’ve already paid tax on the first $20,000.
Here’s how it works.
Win a car, get a tax bill of $2,000. The studio pays the bill for you.
That counts as an extra prize of $200. You have to pay tax on that prize. The tax bill is $20. The studio pays the bill for you.
That counts as an extra prize of $20. You have to pay tax on that prize. The tax bill is $2. The studio pays the bill for you.
That counts as an extra prize of $2. You have to pay tax on that prize. The tax bill is 20c. The studio pays the bill for you.
That counts as an extra prize of20c. You have to pay tax on that prize. The tax bill is 2c. The studio pays the bill for you.
Sure, but see the second example I gave in that post. There seemed to be a problem with thinking of it this way as well.
But anyway, I’ve overcome my confusion here. It’s as simple as this. The goal is for me to walk away at the end of the day with $20,000 in hand. At a ten percent tax rate, the way to achieve this is to give me $22,222.22. After paying the tax on that, I have $20,000 left.
-FrL-
Isn’t it simpler to use some basic algebra and solve “X*0.9 - 20000”?
That’d be a simulpost.
-FrL-
Wouldn’t it be even simpler to take out a short term loan to pay for the taxes ($2,000), then get the $20k vehicle. Sell it at a depreciated value of say $17,500, pay off the loan principle and loan interest and walk away with about ~$15,000?
No, it wouldn’t be simpler.
-FrL-
Compared to the following quote? It must be simpler.
But your post was in response to
.
The procedure you described is not more simple than the one described above. Your way also nets less money. 
-FrL-
It seems kind of crazy that game-show prizes are taxed in the USA. They’re prizes! WHy the hell should you pay tax on them?
Are lottery prizes taxed there too?
Over here, game show and lottery prizes are tax free – in fact all betting wins are now tax free since the gambling levy was abolished in (I think) 2001.
My understanding is that, in Australia and NZ, you don’t have to pay taxes on winnings from gambling, raffles, lotto, or game shows etc.
Having said that, you do pay sales tax when you use the money to buy things, and if you put the money in the bank then you have to pay tax on the interest you’ve earned.
Taxing people for things they’ve won is just screwed up though, IMHO.
Back in the early eighties I worked w/ a guy who had won on TPIR. His prizes were withheld until the program aired couple of weeks later. He was involved in an intensive search to find a retailers who would give him a written price quote on the items he had won (I recall a patio furniture set and a color TV) so he could establish a retail value for tax purposes. Unfortunately, for him, that was not his only problem. His mother had died during that same year and he and his girlfriend had sold her house and spent several months traveling, in luxury accommodations, w/o any consideration of the tax consequences. Now broke, they were trying to limit their liabilities.
On several occasions, I have won cash prizes, over a thousand dollars, in Nevada casinos and they only required that I sign a receipt and provive my SS number, there was no mention of withholding any of the money.
True, but my response to that quote was meant throw out the whole idea of paying all these taxes on tax money given to you and just doing it in a “simpler” method of getting your prize with a lump sump payment of tax with borrowed money. It wasn’t meant to be a literal response to the equation. Plus the methods given so far almost sounds like a philosophical debate (not sure which one, anyone remember?*), in which you will never get to zero by taxing 10% of the given tax money every single time. It doesn’t stop at 2 cents.
Not sure how I would net less cash though by getting a loan. Possible issue with the depreciation and resale value is all I can see. Any minimal loss on the loan interest still sounds worth it, assuming a quick sale. But at 2k, it’s might be worth it to wait for the best resale price you can get.
*I think it involved splitting halfs and never reaching a middle point or such.
Yes. Lottery winnings are taxed.
Taxes are due on gambling winnings, legal or not, but gambling losses are only deductable from gambling winnings.