You win You lose

April 30, 2006 9:36 AM

Do contest winners lose money because of taxes?

If I enter a contest and win $100,000 in non refundable travel will I end up having to pay the taxes (US) from my savings? Can I refuse the prize and save my money? I didn't win anything, but reading the contest rules started scaring me away from even playing. What do people with no savings do in that situation? This whole system just seems wrong.

posted by gearspring to work & money (22 comments total)

Often there's an option to take the cash value of the prize for that very reason. Otherwise, if the prize is transferrable, you can sell it, pay the taxes out of whatever you get for it, and hopefully still make a profit.
posted by Acetylene at 9:57 AM on April 30, 2006

Yes, you have to pay the taxes.
Yes, you can refuse the prize.

People with no savings routinely do one of the following:
a) sell the prize
b) ask for cash instead
c) get totally fucked on the following April

When Oprah said "everybody gets a car!" to all those poor families, she was also hitting them with a large tax bill, unless they flipped the car, in which case they made a relatively small amount of money.

Extreme Makeover: Home Edition threads a legal needle that probably wouldn't hold up in court, but does result in a near-zero tax liability if it does. I say near-zero, because property taxes and such still get affected. (Their method is that the participants "lease" their house to ABC for $50k, and 10 days. ABC then "pays" the rent in home improvements and appliances. Theoretically, rental income for houses rented less than 2 weeks a year is exempt, so it's all tax-free.)

Last year, an American Airlines contest winner declined a prize of 12 round-trip tickets for two, because the valuation was so high ($2200 for each round-trip coach ticket), that the tax bill would've been far more expensive than just buying the tickets normally.
posted by I Love Tacos at 10:46 AM on April 30, 2006

This question was asked in a US capacity, but I'm sure it doesn't apply here in the UK. If you win a prize, you don't pay taxes on it. Ditto for lottery winnings.
posted by wackybrit at 12:05 PM on April 30, 2006

This whole system just seems wrong.

Perhaps, but wouldn't it open the door for evasion schemes if winnings weren't taxable?

Wackybrit, how is that countered in the UK?
posted by randomstriker at 12:08 PM on April 30, 2006

I say near-zero, because property taxes and such still get affected.

I lived across the street of a home that underwent an Extreme Makeover, and was told that the winners would only have to pay the property tax on the original house. I'm not sure of the specific details (as these things go, there's always tons of speculation), but I heard it had something to do with the speed at which the new house was put up--that is, if it had taken them a month to do the job, it would be considered a new home, but as it only took 5 days (seriously, it was unbelievable) the rennovation falls under some kind of exeption category.

The town apparently also provided an exemption (for future years of potential property tax) for something like 10 years, provided they stay in the home.

Incindentally, they're selling the home as soon as their contract is up with ABC (though the contract doesn't cover things like cars or boats or other assets which they are free to sell off immediately).
posted by Civil_Disobedient at 1:36 PM on April 30, 2006

That system just seems stupid, I think they ought to tax the people giving the prize, rather then the one accepting it.
posted by delmoi at 3:19 PM on April 30, 2006

I've never thought about this, it's a good question. Ireland is the same as the UK - both general prizes and big lottery winnings. My godmother has won a colossal number of prizes over the years (she's the only one in the family with any luck, and the rest of us have none) including shopping sprees, cars, holidays, and cold hard cash. I can't imagine what her hobby would be if she was taxed on it!
posted by jamesonandwater at 3:48 PM on April 30, 2006

Some of this was covered in a recent Slate Explainer.
posted by cwhitfcd at 4:28 PM on April 30, 2006

That system just seems stupid, I think they ought to tax the people giving the prize, rather then the one accepting it.

Nah, income is income; you gotta pay the tax. What they should do though, and what Oprah did do in the end, is "gross it up" -- add a sufficient amount of cash to the prize so that the cash pays the taxes and you still get the prize. The amount of cash should be ((value of target prize) / (1 - marginal tax rate) ) - (value of target prize). So, say Oprah gave away $12,000 cars and her audience members were in the 15% bracket:

($12,000 / (1 - 0.15) ) - $12,000 = $2117.64

Then the tax on the total prize, $14117.64, is $2117.64. Problem solved. Why don't the gameshows do this??
posted by rkent at 4:41 PM on April 30, 2006

Why don't the gameshows do this??
Because it would cost them more money??
posted by whatzit at 5:13 PM on April 30, 2006

With taxes, it's not a prize in my book -- just a good discount.
posted by evil holiday magic at 5:25 PM on April 30, 2006

rkent, since different people are in different tax brackets, wouldn't that make it rather complicated to give out prizes? you'd have to know who the winners are and the details of their income before you could budget accurately for a prize give away.
posted by randomstriker at 5:33 PM on April 30, 2006

cwhitfcd, the Slate article you linked is mathematically stupid. No need for infinite series in the Richard Hatch example, just do one simple division like rkent explained.
posted by randomstriker at 5:42 PM on April 30, 2006

I like our system better. If you earn the money--from a job, from clever investments, etc--you pay taxes. If you gamble and win, it's all yours, free and clear.
posted by dirtynumbangelboy at 5:53 PM on April 30, 2006

As dirtynumbangelboy said, gaming, gambling, lottery and other contest winnings are not taxed in Canada.

Also, the revenue treaties were recently amended, I believe, such that when Canadians make money at gaming in the US that they are able to recoup any taxes that the IRS takes off automatically.

That is, a Canadian a bunch of stuff on The Price is Right or a pile of money on Jeopardy no longer pays tax on the winnings, and a Canadian who wins a jackpot or poker tournament in Vegas (where taxes will simply be chopped right off the top) can claim that money back from the IRS.

I may not have the particulars correct, but there's been some change in the last ten years.
posted by solid-one-love at 6:37 PM on April 30, 2006

As dirtynumbangelboy said, gaming, gambling, lottery and other contest winnings are not taxed in Canada.


I've never done it, but Casino Windsor was advertising "Tax-free gambling" to Americans in Detroit.
posted by dagnyscott at 7:06 PM on April 30, 2006

rkent, since different people are in different tax brackets, wouldn't that make it rather complicated to give out prizes? you'd have to know who the winners are and the details of their income before you could budget accurately for a prize give away.

I guess, but you could just assume that everyone is in the top bracket (36%), and then you'd always have money left over. There would definitely be some additional administrative complexity from grossing up in-kind prizes, but it would make life a helluva lot nicer for the winners.
posted by rkent at 7:50 PM on April 30, 2006

Related to my first post: I see from this blog that I may have been wrong about Oprah grossing up the cars -- Pontiac paid the sales tax but I can't find confirmation of the income tax payment.
posted by rkent at 7:55 PM on April 30, 2006

Anything over $10,000 in cash or 'kind' you win in a lotto or a casino or bingo or drawing or The Price is Right or from a dead Unkle you're on the hook to pay taxes. Period. After this is figured into your tax return gives the amount of tax that is owed. Now if the organization doesn't submit to the IRS that they gave you something they will never know... But, they probably will because of the dollar amounts and they need to keep 'clean.'
posted by freeflytim at 8:58 PM on April 30, 2006

I belive that this came up on an AM radio show, Ask Mr.KABC, out here a few years back. I seem to remember MrKABC getting some sort of confirmation that the winners of "Who wants to be a millionaire" were in fact "millionaires" in that the actual prize awarded covered the taxes as per rkent above - the winners would walk away from the show with a million after taxes.
posted by asparagus_berlin at 10:27 PM on April 30, 2006

My parents won a $45,000 slot machine jackpot in Reno in 1989. They were given the whole sum at that time (not sure if that practice has changed now), but $15,000 of it went to taxes the next April. (They won the jackpot in October, so they were at least able to squeeze a little extra out of that $15,000 by putting it into a 6 month CD).

I did not know that winnings weren't taxed in other countries. That seems far more reasonable. There's one more reason to move to Canada.
posted by Marla Singer at 3:16 AM on May 1, 2006

Perhaps, but wouldn't it open the door for evasion schemes if winnings weren't taxable?

Wackybrit, how is that countered in the UK?

I have no idea, but I bet you'd get your ass kicked when you get audited. Not only would the tax man be on your back, but whoever's involved with competition and lottery regulations would probably want a piece too. Good question though!
posted by wackybrit at 12:41 AM on May 4, 2006