11/8/2011 6:11 PM ET|
Win a game show? That'll cost you
You have to pay a lot in taxes
What you end up paying in taxes is based on what the show says the prizes are worth. Foreman says he paid at least 30% in taxes.
"California sales tax was automatically deducted from the check I received for the amount of the game systems and movie tickets. Then, at the end of the year, I received a 1099 to do my state and federal taxes with," Foreman says.
Elliott says the amount a show will pay a winner in lieu of the actual prize, as well as how it values other prizes, is based on fair market value.
"Fair market value is the amount by which a willing buyer would purchase from a willing seller; estimates are used when something is unique," he says. "Items such as a vehicle are based on sticker price with options. Airfare is difficult, as it is based on many variables such as travel time, cities traveled, etc."
But game shows don't always look at the fair market value that you would pay in a local store. They use what they might pay. And if their price is higher because the show is taped in a more expensive area than where a contestant lives, the contestant winds up paying more in taxes.
"The prize value is usually based on manufacturer's suggested retail price, which may be 20% more than what it is actually worth," says Martha O'Gorman, Liberty Tax Service's chief marketing officer, in Norfolk, Va.
For example, a New Yorker who wins a 2011 Chevrolet Traverse might be looking at paying taxes on an MSRP of $29,999, even though price tracker Edmunds.com reports most buyers are paying just $29,076 for the SUV. That's an extra $231 in federal taxes for someone in the 25% federal tax bracket.
Game show winners can fight the estimated values in tax court, but those legal battles can take months and rack up hundreds of dollars in court costs, negating any savings in taxes.
Typically, Elliott says, contestants who win cash can decide whether they want any taxes deducted -- to reduce how much they'll have to pay the following April.
When state taxes are withheld, the money "is automatically paid to the state where the prize was won," Elliott says. That's not a problem if you happen to live in the state where you won. But if you don't, you could be taxed twice.
"If you live in New York but win on a show in California, those winnings, or income, are taxable to California on a nonresident return. They are also taxable on your New York return," Elliott says. "You would receive a credit to avoid double taxes in this situation, though you would pay some tax after all, since the tax in California for a nonresident is approximately 10% and a non-NYC resident is about 7%. So you would pay California the higher amount and get a credit on the lower New York amount."
If you lived where there was no state income tax, such as in Florida, Texas or Washington, you'd still have to file a nonresident tax return to pay California approximately 10%.
Then there are the federal taxes that winners have to pay.
"Most people fall into a bracket of about 25%. However, federal taxes could be as high as 35%, depending on how much you win," Elliott says. And remember, winning big could push you into a higher tax bracket, which means you'd pay more at the end of the year on all of your income.
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Do your research! You should really fact check before you print incorrect information. You do not have to pay taxes on what the game show reports--only on what the real fair market value is. In other words, if you see an advertisement for a similar product, or if you sell the product (for a reasonable price that's the amount you report. (I.e., you can't report $100 for a $1,000 product, but you could report, say, $700 if that's what you sold it for.) Just keep your back up documentation for the IRS or even send in copies of your backup with your tax return. If you donate to a charity you can report and write off the amount of the donation. And you don't have to go to tax court to prove your point. I know this from experience. I sent in my documentation for reporting less than the game show stated and it was accepted--no problems, no sweat.
And why dramatize getting cash instead of one of the prizes a bad thing, especially when you're getting the value of the prize. Most people would rather buy of item of their choosing, save or invest the money in a house, etc. than be saddled with an okay or so-so prize. If one likes the prize that much they can always buy it with the money.
I also find it interesting how you give your readers the opportunity to post with a nickname, but when I tried it wasn't functioning, even after several repeated attempts. When I tried to post with my real name it took the information right away. Hummm.
I don't understand what the problem or complaint is. The taxes are only a fraction of the value of the merchandise so you are still getting a fabulous value for your dollars. Win a car..........sell it, buy a
lesser car and put the difference away to pay the taxes. Not really rocket science.
To clarify the tax liabilities cited erroneously in at least 2 other comments such as from "cmrinseattle" Federal taxes are incremental and are applied in a progressive fashion, not a single percentage applied to all earnings as has been reported by others. In other words, if you move from a 22% bracket to a 30% bracket (which is not a correct jump), the earnings that take you to the cap of the 22% rate do not affect the rate on your existin gwages. For example if you win 10,000 and your earnings go from 60,000 to 70,000 and the break point percentage wise is 65,000, you would be taxed for 5000 (the jump from 60,000 to 65,000) at the 22% rate and the next 5,000 (from 65,000 to 70,000) at the 30% rate. Please click more to see the best part of this post.
Don't start trying to advise people about tax law if you don't understand the system yourself. This kind of misinformation is what leads people to make stupid economic decisions. By the way, I'm an engineer, not a taxman, but I study subjects that directly affect my life. I might suggest that others do this too.
it has been that way forever, (or at least as long as we have had income tax). i remember it happened to the winners on game shows in the 50's as well as bingo and other prize giving games.
it is considered income and anyone who doesn't know it has either lived under a rock, or delusional,
or just plain gullible. it is a part of life, live with it, if you win a car you couldn't buy, sell ig and pay the taxes, then you have the remainder to spend as you wish
"And remember, winning big could push you into a higher tax bracket, which means you'd pay more at the end of the year on all of your income."
sadly, i had to read all the way to the end to realize that this article is a bunch of crap
"Thom" in the article says THEY taxed everything. So who is THEY, the game show?? Nope it would be our federal government who calls the shots on this. I have a hard time believing the prize winners had no idea that their winnings would be taxed.
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