question about taxes on a Prize

[flop]

A local Fox affiliate is having a contest to give away a trip to the Daytona 500 NASCAR race valued at $5,000. I am one of 6 people in the drawing for that prize, so my chances aren’t all that bad. I have a annual income of $3,500 as a college student, and because of it get federal financial aid. IF I were to win this prize, would I have to claim the $5,000 cash value just like cash income on my federal income taxes at the beginning of next year? Or would I just have to pay taxes on the prize, and not include it’s value as part of my total income? I would have no problem paying taxes on the prize if I were to win it, the reason I’m asking is because I rely on my low income to keep my financial aid to be able to pay my way through college. Thanks for reading and hopefully answering.

[Stan_Doubt]

IIRC, most prizes of this type are taxed as winnings from sweepstakes, lotteries, etc on federal taxes. If you win them, you are supposed to claim them on your taxes, though not necessarily as “income”

In fact, if you win enough, it’s common for the issuer to hand you a tax form along with the prize certificate.

[ccwaterback]

If you win, you probably will have to pay taxes on the winnings. As far as your financial aid, the next time you apply I would include a letter with your application explaining your prize winnings as a one-time, non-cash, award that is highly unlikely to be replicated in future years.

[racer72]

If you win, make sure you are only taxed for the actual cost of the prize. They may be advertising the value of the trip at $5000 but it might only cost them $2000. I won a car in 1984, suggested value of $4495, I only had to pay taxes on $3320, the amount the sponsors of the giveaway paid for the car.

[Shalmanese]

So what if the sponsers got the car for free in exchange for the publicity, how would the tax situation work?

[astorian]

I’ve won a few vacations from TV stattions through trivia contests, so I can tell you this:

Any legitimate sponsor of a contest with a major prize will send the winner a registered letter with paperwork (including some IRS forms) to be filled out, signed and notarized. They will also send you a 1099 form the following January. So, the IRS will know about the prize, and will expect you to pay the appropriate tax, based on on the stated value of the prize.

In SOME instances, you can negotiate the value of the prize. That is, suppose you you win a Ceramic Dalmatian (like the ones they used to give away on “Wheel of Fortune”) in a contest, and the sponsor claims it’s worth $1000. You try to shop it around, and find that, as a practical matter, you can’t get anyone to pay you more than $200 for it. You CAN go ahead and sell it for $200, and use the receipt as evidence that you should be taxed for $200 of income, rather than $1000. If you notify the IRS of this, they may go ahead and work with you and tax you on the real-world value of the product.

But one way or another, you ARE going to get taxed. A prize is income.

[Duckster]

@Shalmanese

So what if the sponsers got the car for free in exchange for the publicity, how would the tax situation work?

It has everything to do with ownership of the prize. The contest sponsors may say they are giving away car, but that does not mean the sponsors take ownship of the car before they give it to the winner.

For example, if XYZ organization is having a contest where the first prize is a 2005 car, you can bet the XYZ organization has persuaded a dealer to donate the car in exchange for the free publicity. The dealer can write off the donated vehicle to their advertising budget. The winner of the car actually takes ownership direct from the dealer and not the XYZ organization.

Aftter all, that’s how Oprah did it. She never bought all those cars that “she” gave away on her TV show. She persuaded GM to give away the cars on her show using her name. Oprah got the publicity. So did GM. And all the “winners” got stuck with the tax bills.

[flop]

Thanks for the advice you have given me. It is greatly appreciated. Could anybody say for sure, if the $5,000 would be treated on my taxes just like another 5K I earned from working, and then count toward my total income, or is it separate? I really appreciate the help.

[astro]

See tax treatment of lottery & prize winnings from the Motley Fool.

When lottery winnings are taxed
Report your windfall in the year the prize (be it cash or a car) is received – regardless of when you might have won it. If a state lottery prize is payable in installments, you must include the annual payments and any amount designated as interest on the unpaid installments in income, as received. If you elect to receive payment of a state lottery prize in a lump sum, you must include the entire lump sum in income in the year received.

Consider the lucky person who wins the lottery in December of 2001. But because of delays in presenting the ticket to the authorities and administrative time to actually issue the payment, the check was not given to the winner until January of 2002. Regardless that the actual win took place in 2001, the income isn’t reported until 2002.

Withholding
If you win more than $5,000 in the lottery, 27% must be withheld from your winnings for federal income tax purposes. You will receive a Form W-2G from the payor showing the amount of lottery winnings paid to you during the year and the amount of federal income tax withheld. (This information also gets sent to the IRS.)

You must give the payor your Social Security number. The payor might use Form W-9 to request this information from you. If you fail to give the payor your Social Security number, 31% will be withheld. If state income tax withholding is required, the amount of state income tax withheld might also be shown on Form W-2G.

Estimated taxes
Since your federal tax bracket can go as high as 38.6%, which is well above the 27% they will withhold for large winnings, the amount of tax withheld from your lottery winnings might not be enough to cover your tax bill. On top of your regular tax liability, you could be assessed an additional penalty for failure to make estimated tax payments during the year. Thus, you might also have to make estimated tax payments in advance. If you think this might apply to you, read up on the rules about prepaying your taxes. But, more importantly, there are loopholes at your disposal that will spare you, so make sure you check out the estimated tax penalty exceptions.