It’s the moment many sweepstakes contestants dream of. The one where that block of bold, flashing text crosses your eyes: you’ve won. It has happened to many others and it could happen for you as well.
No matter what your prize is, whether it be cash, a vacation, an automobile, or something else – it’s time to celebrate. However, in the midst of that celebration, there are still some details to be worked out, especially if you’re headed home with a brand new car.
Your prize isn’t going to be free per se, as you still have to pay taxes on winning a car. Depending on the price tag of your new vehicle, that might be more than you expect. How does the tax process work for this kind of win? Read on.
1. Sweepstake Prizes & Income Tax
When you entered that dream car competition, you probably weren’t expecting to actually win. And yet, here you are. However, this lack of forward-thinking might have left you in a situation where you don’t have the funds needed to accept your free vehicle.
What do I mean? I’m talking about income tax.
Under federal law, all sweepstakes prizes given out in the United States must be considered a form of income for the person who has one said sweepstakes. That means the fair market value of the vehicle will be added to the total income amount you’ll report to the IRS come tax time.
How much does that mean will actually be coming out of your pocket and heading to the IRS? A rough estimate would land you at about one-third of the vehicle’s total cost. As you can probably reason, the means the bigger and fancier your win, the more you’ll end up owing in tax payoffs.
Sometimes this tax burden can be so much that a winner can’t actually accept the ‘free’ vehicle that they have won.
2. Dealing With Tax Requirements
If you’re worried about ending up in this situation yourself, what can you do to stave off tax needs or rise to the occasion?
First, you’ll want to make sure that you do all your math properly. Get the most accurate valuation of your new car possible. Map out what that’ll mean for you come tax time and see if you can budget away to afford the win by then.
It also might be worth speaking with a tax professional. Are you eligible for tax deductions that can help lower your burden? Is there a way to clarify other debts that can help to keep your overall payment down?
An experienced tax professional will help you determine how best to approach the problem at hand, using the specifics of your financial situation.
Paying Taxes on Winning a Car
It can be a great feeling to win big in a sweepstakes. However, that doesn’t mean there won’t still be a few twists and turns in your road. Paying taxes on winning a car can be complicated, after all, but the above information can help.
