11/8/2011 11:00 PM ET|
Win a game show? That'll cost you
The chance to win fame and fortune -- or at least enough to pay off a few bills -- has lured thousands of Americans to vie for spots on TV game shows over the years.
But game show contestants often don't realize one big catch: If they win, so does the tax man. Here's a look at some past contestants who discovered that winning wasn't all it's cracked up to be.
You don't always get what you win
Julie Jackson, now 22, put her price-guessing skills to good use and won the chance to appear as a contestant on a May 2007 episode of "The Price Is Right." The Phoenix resident won roughly $10,000 in prizes -- a seven-day trip to Austria and a set of golf clubs.
But just because Jackson won these things doesn't mean she received all of them. She got the trip to Austria but was given cash in lieu of the golf clubs after being told the clubs weren't available.
Chad Foreman, 37, of Fayetteville, W.Va., had a similar experience on the same show. After winning a trip to Brazil, a recliner, video games and other prizes, he got a surprise backstage.
"They said, 'We are offering you cash instead of this prize,' at the end of the show when I sat in this room signing paperwork. They told me they weren't giving me the video game systems and games or the movie tickets for a year. They were giving me the cash value of those prizes instead," Foreman says. "So I got the cash, which totaled about $4,000."
Phone calls to the show and to its production company, FremantleMedia, seeking an explanation were not returned.
You won't collect anytime soon
If you hope to get on a game show to "save the farm," you'll be disappointed. That's because winners say it can take weeks -- even months -- to collect prizes.
In August 2010, Danielle Matlin, a 20-year-old college student in Los Angeles and contestant on "Let's Make a Deal," waited six months to collect a meager $300 cash prize. "I could not receive my money until the show was aired. Once aired, they had 90 days to send me the money."
At least earning the money was easy.
Matlin says all she had to do was play a word game with two other contestants. "We had to think quickly and name things of the category the hosts listed without repeating anything. I was pretty focused and didn't repeat anything. Luckily, the other contestants did, making me the last one standing."
Sonja Fisher, 42, who was on "Catch 21" in November 2010, says she had to wait about eight weeks to receive the $2,000 she won.
You may want to decline some prizes
Contestants should be prepared to pay taxes on every prize, even coupons and vouchers. If you win a year of housecleaning services or six personal training sessions, expect to be taxed.
When he was a broke college student living in California in 1987, Thom Singer, now 45, won $20,000 in cash along with a trip for two to Brazil, a sailboat and a stereo on "The $25,000 Pyramid." He also scored several "parting gifts."
"They taxed everything I won, including all the parting gifts, like a really ugly watch, coupons for a year's worth of cough syrup, a case of Otter Pops, etc.," Singer says. "I should have declined all the parting gifts, as most were dumb and went unused."
Unfortunately for Foreman, he found out too late that he could have declined the parting gifts. That's information he could have used to save on his taxes.
You need a financial plan -- fast
Singer says that if he could do it over, he would take the money and use it as the down payment for a house or condo instead of blowing it. "Winning $20,000 as a college student meant I had some 'free money.' I was young and traveled on the money," he says.
By the time his money ran out, Singer says, he had become accustomed to a life of excess. And to maintain his lifestyle, he looked to plastic.
"I had become used to such things that I ended up running up my credit cards to keep the lifestyle. I had never carried debt in college before the windfall," Singer says.
"It's tempting to splurge once you receive that check," says Steven J. Elliott, a senior tax manager at Elliot Horowitz in New York. "That's why it's smart to have a solid financial plan that includes how you're going to use and invest the money before receiving the check."
That plan also should spell out how you'll pay Uncle Sam, because he's going to have his hand out.
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.
VIDEO ON MSN MONEY
Copyright © 2014 Microsoft. All rights reserved.