I watched the new Let’s Make a Deal tonight. One fellow was quite excited because he won a new VW Beetle. He mentioned that he really needed a new car because his car was a 14 year old something or other. I got the impression that he couldn’t really afford a new car.
Now, I’ve heard that prize winnings in the U.S. are taxable (it’s my understanding that they are not here in Canada). If the guy won a car, would he have to take the value of the car into his income next year, potentially having to pay a few grand that he didn’t even have to spare in the first place? I suppose he could just sell it to pay the taxes and use the excess to buy a used car, but it still seems like kind of a gyp.
Prizes and Awards are fully taxable by the US at their fair market value. I’ve never won a prize like that, but it is my belief that you have to pay the taxes immediately. If the prize is in cash and over a certain amount, the income tax is deducted in advance.
It counts as normal income during the year you win it, and taxes are due on it on April 15 the following year. My father was an avid sweepstakes guy and won many big prizes over the years. Two years ago he won a Ford Explorer, and didn’t declare it and pay taxes on it. Last year he died, and the IRS came after his estate for it. We had to pay them about $8800, IIRC. We got them to waive the penalties, or the total would have been about $11000.
For some (but not all) states, lottery winnings are exempt from state but not federal taxes. Elsewhere, IIRC, some national lottery winnings are tax exempt in that nation.
Forced as part of the game? He would only have to pay taxes on the amount of money he recieved as winnings which would be $25,000.
Now if he took his $50,000 in winnings to the Tropicana and lost half of it in blackjack he would have to pay taxes on the whole $50,000. You can only deduct gambling losses to the extent of gambling winnings. Winning a game show isn’t gambling.
Yeah, in September I won a Camaro Z28 for five bucks in a raffle. The people I won it from sent me some IRS form that listed the 26K they paid for it as misc. income for me. I will have to pay taxes on it pretty soon. Still, I could sell it and make 7 or 8 thousand dollars (over the taxes), and that money would be tax free.
I think it’s nuts. If you win a car, you should bloody well be able to keep the car, and not have to pay anything for it. It’s not earnings, its winnings.
True, it’s not “earnings.” But it is income. If you get interest on your savings account, that isn’t “earnings,” either, but it’s still income, and you still have to pay taxes on it.
Actually, it would make more sense to argue (as some tax protesters have, unsuccessfully) that your salary shouldn’t be taxable, since you’re just exchanging your labor for cash, so it isn’t “income.”
Earnings = winnings = income. The tax is on income, not just earnings. Income tax really isn’t my forte, but I seem to remember a definition for gross income: If you have an increase in value that is both realized and recognized and it involved another person (company, group, individual, etc.), then you have reportable gross income.
One example I read involved building a dog house out of lumber in your own yard. You have an increase in value, but because it did not involve another person it isn’t reportable income.
Also, you work the final week of a year, you have recognized income, but you don’t realize it until the following week when you are actually paid (assuming a cash basis individual). Thus, that income is reported in the following year when your have assumed control of the income rather than the previous year when you earned it.
Really fun stuff, and I’m glad I stayed away from it.
California takes 7% off the top for game-show prizewinners, but they don’t have to file state income taxes. If the prize is merchandise instead of cash, the winner has to send in the money worth 7% of the stated cash value before it is shipped - some winners don’t bother. New York, however, does not tax casual income from nonresidents. Federal income tax is not withheld in either state, but is due anyway - the 1099 form guarantees that Uncle will find you if you don’t pay him his due.
To clarify a fact for Morkfromork, taxes are not charged on prizes or awards here in Canada. Lottery winnings, raffle prizes, game show winnings, money won at casinos or racetracks–it’s not taxable. Not in Canada anyway; it is my understanding that if an American were to win money from a Canadian lottery, casino, racetrack, or contest of some sort, he or she should report it to the IRS at tax time. Of course, whether or not he or she does could be another matter entirely.
But if you, Morkfromork were to win big in, say, Las Vegas, you might well find that some of your winnings would be withheld for US income tax. Depending on the amount, you might be able to get your money back from the IRS–currently, I’m hearing a lot of ads on a local radio station for an outfit that specializes in recovering money that has been witheld for US income tax that was won in American casinos by visiting Canadians. I’m unsure how this works, however.
The IRS believes that paying the tax immediately is a sign of a scam. You might be thinking of an estimated tax payment, which is something the IRS says can happen.
From the IRS list of scams
It is an accretion to wealth. Under U.S. law, any accretion to wealth that is not a gift is taxable. Indeed, there is legitimate question as to whether a tax that exempted certain categories of accretion to wealth would even be constitutional under U.S. law.
It is an accretion to wealth. Under U.S. law, any accretion to wealth that is not a gift is taxable. Indeed, there is legitimate question as to whether a tax that exempted certain categories of accretion to wealth would even be constitutional under U.S. law.
No one’s forcing you to take the winnings – you can always disclaim them if you want to avoid the taxes.
Personally, I always thought the way the IRS handles gambling was pretty cool/sneaky. If you lose, then the gambling was entertainment and not deductable just like the money you spend on movies or anything else is non-deductable. However, if you win, then the gambling was business and therefore the winnings are taxable income.
According to the IRS tax instruction booklet on page A-6 Instructions for Schedule A to Form 1040, Itemized Deductions gambling losses are a miscellaneous deduction from, and up to the total amount of, gambling winnings.
quote: Robb "Pay the Tax, Then Get the Prize. The caller says you’ve won a prize, and all you have to do to get it is to pay the income tax due. "
Nobody said you had to pay the prize giver the tax in order to get the prize. However, it is my understanding that under the “pay as you go tax” system that has been in effect for a long time now, the tax is due when the income is earned and paid. You are allowed to defer payment for a maximum of 3 months if you pay estimated taxes, which I do. However, if I underpay my estimated tax in any quarter I get penalized.
So, I think if you win a prize in the first quarter you have to pay the tax on it on by April 15. In the second quarter by the 15th of June, and so on.
I have heard the following and wonder if it is true: If you win a new car, for example, the IRS values it at the full retail price, and that is what you have to pay the tax on. In many cases, that is an inflated price, and does not indicate the price it would actually have been sold at. If you can’t pay the tax, and have to sell it to get the money, you probably will have to sell it at a loss (that is, less than the supposed value). Can you claim this as a business loss or something, or will you still have to pay the tax on the full retail price, even though you never realized that amount?
David- well, technically, yes. But realisticly, no. Since most dudes pay their taxes through witholding from wages, the IRS would understand & waive any penalties from estimated taxes in such a situation. Now, I am talking about just a car or something, mind you. Win a million bucks, and the situation changes. In case of cash, they should withhold a reasonable % anyway, however.
Richard- an excellent question. Depends. I’d say that if you went to a local dealer, and got a price quote on them selling you that exact same car for a few thousand less, then yes- that would be the correct “FMV”. But NOT the price you could sell it for, since then you are effectively selling a “used” car. YMMV, consult your tax professional (I am not such, but my brother is).
In many cases, the prize dudes will offer a cash replacement. Then of course, there is withholding, and the question of “FMV” never comes up.
And PLEASE- listen to Robb. Never pay anything to get a prize (Ok, maybe a couple bucks S&H). A classic scam is the one he is talking about. You NEVER have to wire them cash to get your prize, taxes or no. If you have won cash, they pay the IRS directly.
This us not entirely correct. There are forms of “wealth accretion” that do not count as income and are not taxed.
Two come to mind immediately:
Inherited money. You do not have to pay Federal tax on inherited money. The dead person’s estate MAY have to pay taxes on the money before it’s distributed, but the receiver doesn’t owe anything.
Proceeds from winning a lawsuit. The winner is theoretically being paid for damages or losses or injury, and the award is not taxable.
Not all lawsuit proceeds are free from being taxed.
Damages received for personal physical injuries or sickness are generally tax free. Damages received for lost wages, back pay, slander, etc are taxable.