Taxes on prize winnings

Hmmm… slight OT – what’s the likely tax situation of that bozo terrorist who’s taking the $27 million and going to England?

What you DON’T want to win is a vacation. If they report the value of the “vacation” at retail value (full fare ticket, rack rate on the hotel room, etc.) the taxes on the vacation could be greater than a deal you could get from a travel agent or over the Internet.

A lot of people have won prizes and learned to regret it.

  1. Inherited money is a gift and, as I mentioned in my earlier post, gifts are the one primary exception.

  2. Lawsuit proceeds. I admit Congress and the courts are not quite as thoughtful about the question as they should be, but in general legal judgments are taxable when and only when they represent an accretion to wealth. Lawsuit winnings for non-economic, non-punitive damages (such as pain and suffering damages) are not an accretion to wealth, and typically they are not taxable. They are meant to be a penny-for-penny replacement for the injuries caused by the defendant. (Of course, they’re rough estimates in the extreme, but theoretically, the arm you lost, the claim for the injury to the arm before you go to trial, and the money you’re paid in damages for the arm after you win at trial are all worth exactly the same amount.)

Economic damages such as lost wages or recompense for a breach sales agreement are accretions to wealth as they replace payments that would have been taxable had there been no incident which lead to the suit. Punitive damages are a windfall to the plaintiff; they represent an accretion to wealth and they are taxable.

–Cliffy