Won a New Car? 8 Ways to Afford the Taxes on Your Prize
Worried About Paying Taxes on a Car Prize? Here’s How to Do It
Winning a new car is a dream for many sweepstakes fans. Owning a brand-new set of wheels without having to pay the manufacturer’s suggested retail price is a great deal. However, before you throw yourself into trying to become a car winner, you should make some plans for what to do once you’ve actually won a car. The dream can turn into a nightmare if you aren’t prepared for the consequences..
In the United States, winners are required to pay taxes on sweepstakes prizes, which are treated as income for tax purposes. That means you’ll be required to add the fair market value of your prize to your earnings from jobs and other sources when you report your income to the IRS.
The amount you’ll have to pay once you’ve won a car depends on your specific circumstances, but you can make a rough estimate that you’ll be paying around 1/3 of the prize’s value. So if you win a vehicle worth $30,000, you can expect to pay around $10,000 in taxes.
A $30,000 car for $10,000 is a great deal, but it can be a challenge to find an extra ten grand in your budget.
Don’t think you can afford it? Before you decline a car prize because of the taxes you’ll have to pay for it, here are eight creative ways to make your car more affordable.
Consult With a Tax Professional
The first thing that you should do after you win a new car (or any other large sweepstakes prize) is to consult with a tax professional. This should be done as soon as you receive the win notification so that you can get the earliest possible start preparing for your taxes. Your CPA or accountant can give you advice that is tailored to your situation, which is vital to ensuring that you are properly prepared.
If you don’t have a tax professional to help you, these tips will help you find an accountant who is right for your needs.
Don’t Panic – You’ve Got Time to Plan
Remember that you will pay taxes on your new car win in the year you take possession of the car, not on the date you found out that you were a winner. Especially in the case of large prizes like cars, it takes time for your win to be verified and your prize to be delivered.
For example, if you found out that you won a vehicle in August of 2018 and take possession of the car in February of 2019, then you won’t have to pay Federal taxes on the prize until you submit your 2019 taxes – usually in April of 2019. This gives you time to put together a plan and save for your taxes.
Research Your Prize’s Fair Market Value
U.S. citizens need to pay taxes on the fair market value (FMV) of any sweepstakes prize, including a new car. The FMV could be lower than the approximate retail value (ARV) listed in the sweepstakes, especially if it takes a while for you to take possession of the vehicle.
Car values drop after the new car models come out each year, so that 2018 model you won might be worth less than the ARV by the time you take possession of it.
So it makes sense to see how much your vehicle is worth at the time you take possession of it. If you find a difference between that value and the ARV, you can dispute the car’s value on your sweepstakes taxes.
Maximize Your Deductibles
If your taxes are going to be rising by the value of the car you won, you might be able to balance out the additional cash you’ll owe by finding ways to lower your overall tax burden.
Examine your finances carefully to see if you are eligible for any deductions or credits that could reduce the total taxes you owe. Perhaps you could make a charitable donation to offset some of the costs. Your tax adviser might be able to find additional deductions and credits you can use.
Set Aside Money Over Time
You can use the time you have before filing your annual taxes to save the money you need to cover the car taxes. Paying thousands of dollars in one hit can be difficult, but if you set aside some money every month you might not even notice the loss.
If you’re not great at saving money, these tips on getting into a money-saving habit could help.
Get a Secured Car Loan to Cover the Taxes
Once you’ve taken possession of the car, you can consider a secured loan to help with the taxes. With a brand new car in your possession, you can usually get a very generous interest rate on a new car loan.
And you won’t have to take out a loan for the car’s full value, since you’re only looking to cover the taxes you owe. You can make lower monthly payments and pay off your loan more quickly than you would if you bought a car with a loan.
Not sure whether a loan is right for you? Here are some things to consider before you get a car loan.
Sell Your Old Car for Tax Payments
Now that you have won a spiffy new car, you don’t need your old one anymore, right? You can sell your old car and put the money that you receive toward paying the taxes on the new one. This can defray some or all of the costs of winning a new car, and could even net you a profit.
If you’re not sure how to go about doing it, Popular Mechanics has tips on how to get the most money when you sell your car.
Sell Your New Car
It may be heartbreaking to contemplate, but selling your new car win could be an intelligent way to cover the taxes.
Many dealers will buy back a new car prize for a good price before you drive it off their lot; after all, they know that the car is in pristine condition.
You can end up with enough money to pay the IRS and still have thousands left over to buy a less expensive car or to use for other purposes.If you've won a car or are interested in winning one, find out how to handle the sweepstakes taxes to enjoy your prize without going bust.
Taxes on Prize Winnings and More!
Editor’s Note: Are taxes on prize winnings reported on your tax return? What about taxes on lottery earnings? We’re here to tell you!
Ever find cash in a jacket or a pair of pants you haven’t worn in a while? Feels great, doesn’t it? It’s the kind of money you weren’t counting on that can help with a looming bill or be spent on something you could not otherwise justify buying.
While winning money might feel just as good as discovering money in your pocket, the two are very different for tax purposes. So before going on a shopping spree, there is one caveat you should know. Unlike money found, winnings are taxable.
Taxes on Winnings 101
Did you know taxes on winnings should be reported as ordinary income? Yes, it’s true. Generally, the U.S. federal government taxes prizes, awards, sweepstakes, raffle and lottery winnings, and other similar types of income as ordinary income, no matter the amount. This is true even if you did not make any effort to enter in to the running for the prize. Your state will tax the winnings too, unless you live in a state that does not impose a state-level income tax.
The tax rate will be determined by your income. So, for instance, if you make $42,000 annually and file as single, your federal tax rate is 22%. If you win $1,000, your total income is $43,000, and your tax rate is still 22%. It’s conceivable that winning a large amount could bump your income into a higher tax bracket. (See tax bracket and rate information explained here.)
Reporting Tax on Winnings
Taxes on Prize Money and Sweepstakes Winnings
Typically, tax on winnings, like sweepstakes or prize money, should be reported to you in Box 3 (other income) of IRS Form 1099-MISC. This includes winnings from sweepstakes when you did not make an effort to enter and also applies to merchandise won from a game show.
Taxes on Lottery Winnings, Raffles, Charity Drawings, and Sweepstakes by Wager
Tax on winnings should be reported to you in Box 1 (reportable winnings) of IRS Form W-2G. This includes lottery winnings, sweepstakes you entered by making a wager, church raffle tickets, or charity drawings. You can claim an itemized deduction for the amount of your wager only to the extent of your gains.
If you receive your winning in property or services, you will have to include the fair market value of your winnings on your tax return.
A Final Reminder About Tax on Winnings
Because the payor may not be required to withhold income taxes, it’s advisable to consult a tax pro to determine if you should make estimated tax payments to cover the taxes resulting from the winnings. That being said, once the tax implications are addressed you may still have plenty of winnings remaining to cover the cost of that coveted item you want to buy.When you come into surprise money, you have to pay taxes on prize money. Learn more with the tax experts at H&R Block. ]]>