Winnings are considered “income” and you can get in some serious doo-doo if you try to hide it. Though reputable places will at least remind you of it when they send you a nice tax doc at the end of the year informing you they’re reporting it to the IRS :)
And it’s not only applicable to things like winning the lottery or hitting it big on slots either. Free *stuff* and giveaways also count! And can put a damper on your party like my boy Joshua is now finding out:
My wife recently had the incredible opportunity to go on a [POPULAR GAME SHOW] and she ended up winning a ton of gifts and a killer trip! We feel sooooo lucky, but…. Of course we found a way to stress about it.
The “fair market value” of what she won is ~$1,500, so we’re going to have to foot a $700 tax bill now. Thing is… it’s hard to enjoy the gifts when you realize you actually had to pay $700 for the stuff, especially when we were not planning on buying a bunch of things for $700. It’s basically like getting to buy everything at your marginal tax rate.
Being conservative you think, “would I have bought all this stuff for 60% off?” (Assuming you have to pay 40% of fair market value in tax)… Sure it’s a great deal, but I don’t think we would have still gone out and bought it all.
So even though we got all these great gifts we found a way to stress about it. Then I realized… Is this $700 going to significantly matter when we’re financially independent? No!!! So we might as well just enjoy the gifts we were sooooooo lucky to receive!
Going to just enjoy it all now :)
[This note was in response to our post on life when you’re financially free, and he’s absolutely right! While it sucks to “lose” money, it’s not going to matter a whole helluva lot once they FIRE. And plus you can still go and sell it all if you really wanted to or even re-gift them to others ;) Which ironically does not trigger any tax implications, at least up to a certain point…]
Remember that time Oprah gave out all those “free” cars to people 15 years ago??! Tax ding, Tax ding, Tax ding!! Haha…
“While General Motors handled the state sales tax on each of the new cars (around $1,800 per car), plus licensing fees, audience members were tasked with paying federal and state income taxes on the value of their new vehicle. To keep things simple, for reporting purposes, General Motors issued forms 1099-MISC to the recipients. While actual taxes payable varied based on individual tax brackets, estimates settled around $7,000 per car.” – Forbes, A Look Back At Oprah’s Ultimate Car Giveaway
Now you can always decline gifts, of course, if you’re not willing or in a position to pay the taxes, but most people never think about that in the heat of the moment (or know about it) and just see FREE FREE FREE!! OMG GIMME GIMME GIMME!!! Haha…
So 1) here’s your notice so you now know!
And 2) never go on game shows or ever get anything free in life ;)
Okay I’m just kidding, but do your best to set aside some $$$ so you avoid any nasty surprises later that can wipe away all that experiential joy…
And for the love of all things holy, do not win stuff on national TV and then IGNORE THE IRS!! They have literally seen you win millions of dollars as well as half of the rest of the world! If you’re gonna hide it, do it on the low or change your identity, jeesh! ;)
So that’s my negative nugget for you today, haha… In more positive news, there’s still time to max out that Roth IRA for the year if you’re looking to up your game! That’s a gift that’ll end up paying you the more times you participate in it – no luck required!
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It’s the same thing with any money we get, even if it’s “under the table”. Even if we don’t get a 1099, we are the ones responsible for paying taxes on the money we make. A good way to ruin or at least set back your financial life is to cheat on your taxes.
It seems like if you don’t win any cash on a game show for pay the taxes, it makes it not worth winning prizes.
It’s crazy how many people DON’T send 1099s or report it too… I’m always reporting more income than the compiled forms I get at the end of the year so I don’t land in trouble later. I like my life!! :)
The Universal Studios tour used take you through the giant warehouse where they keep the tens of thousands of Unclaimed game show prizes (not sure if that is still a thing they show).
Wowwww that would be cool!!
I wonder what they do with it all at the end of the day?! Re-gift them or donate to charities? Probably have to keep for a certain amount of time until they’re allowed to re-release.
Not wanting to sound smug, but in the UK ALL winnings are tax free.
Win £10M on the lottery? Keep all £10m. Otherwise you’d have to pay 40% of it on tax!
Of course we pay higher taxes in general, so it’s swings and round-abouts as we say here, but all gambling income is tax free, from lottery to sports betting, no need to declare any of it because no one is looking for it!
WOW!!!! I wonder if that encourages more people to gamble or not?!
Gonna have to bring “swings and round-abouts” into our language here, haha… I like that.
The contestant coordinators hit that point very hard with our whole group when we were taping for Wheel. They hit it even harder for me after I won (making me fill out some of the requisite forms then and there, as I recall), but, thankfully, I had won more than enough cash to cover it. Otherwise, I probably would have had to sell the car I won immediately.
Seeing as I still drive that car six years later, I’m rather glad I didn’t have to do that.
Totally have to drop your blog post on it for others to see here:
So fascinating!! You really did do good on it!
(Scanning my mind to see if I’ve won anything in the past year that I can’t remember). I don’t think I’ve won anything, but this still sucks. I knew that was the case for cash winnings, because that makes more intuitive sense, but never considered merchandise. That’s kind of ridiculous, actually. I think the only reason anyone goes on game shows is that they don’t realize this is the law until they get a prize and then…wham.
Though it would still make for a great experience! And you can always turn down or sell the winnings if you wanted to too, so still worth it at the end of the day :)
As with many things tax related, the devil’s in the details. For game show/lottery winnings, yes, you are absolutely going to get a 1099 and have to pay taxes on the income that you have taken possession of. However, if they are gambling winnings it will depend on your tax situation. Tax reform has put a bit of a hamper on this area due to the increase in standard deduction amount. You must claim gambling winning “above the line” (AGI) as income, but you can possibly deduct gambling loses. The theory being that you have already paid taxes on the dollars that you lost and should be able to net that against winnings to avoid double taxation on some of those dollars. However, the catch is that you can only deduct those losses on Schedule A (Itemized Deduction schedule), so if you can get enough itemized deductions to exceed the standard deduction then you are able to deduct the losses. If you receive a large cash gift from a family member, however, that may not be taxable as income to you because it is considered a gift. Individuals can gift to others up to a certain amount each year tax free. I can’t remember what that amount went up to now. It used to be around $10-$15K. You will usually see wealthier individuals start gifting up to the gift limits to family member every year as they get older to avoid the tax impact on those dollars if they were to die and the family member were to have to pay taxes on those amounts. Not everything inherited can avoid taxes. :-)
I also just got a note from someone who said it depends on *how* you get the money too, like with casino winnings… He recently hit a $5,000 jackpot, and since it was a “jackpot” he had to file forms before getting the $$, whereas had he just won $100 here and there over time that eventually totals $5,000 he could have just walked out with no one the wiser…
I’m too much of a wuss to risk it in any case, but either way it puts a damper on things for sure :)
J – I’m a sweeper – there is a whole community of us out there who enter sweepstakes for a living. Couple of things I learned: 1. You can only get a 1099 for items valued at and over $600.00 – 2. Some of the companies (sponsors) pay your taxes for you. 3. You can search the cost of the trip and/or prize you won and if you find it cheaper submit your information and pay taxes on the adjusted amount. In addition, if you enter sweepstakes regularly the cost of doing it is a deduction. For me – it’s a side hustle which pays more than enough for Christmas!
Would you ever be up for writing a post around this in more detail? Along with your successes/fails/#’s over time? j @ budgets are sexy (dot) com
I’m always so curious about this type of stuff… I remember running a giveaway site once (TakeOurStuff.com) and bumping into all these “Sweeper” people every day… Some people had their systems on lock!
Move to Canada, the land of maple syrup, hockey, and tax-free winnings!
Dang! We’re doing it wrong here… (no surprise to anyone)
Couple points on the posts above
The reality is if you win anything at a casino, it’s reportable income. It doesn’t matter if it is one $5,000 jackpot or $5,000 in bits and pieces. It’s your responsibility, and if the IRS can prove you won and didn’t report the income they can really ruin your day. You can claim losses, but only up to the amount of winnings. If you spend $10,000 on a slot machine to win $5,000 then you get to deduct $5,000 max. But you have to keep good records! The burden is on the gambler to prove the expenses if audited by the IRS. And don’t forget, those rewards cards at all the casinos. They help keep track of totals, but if you can see the losses, the IRS can probably see the winnings!
Many states don’t tax the lottery winnings if you purchased a ticket in that state. Buy a ticket for Mega Millions in California and win $10,000,000 you pay no state tax. Cross the border to a neighboring state, win the exact same prize and you will owe 13% in taxes to California.
And it isn’t just prize winnings. If you find something of value that you keep, its reportable income. Steal money from someone? Yep its reportable income. Find a stash of illegal drugs and sell them? The value of the drugs is reportable as well as the income from selling them. Remember, Al Capone didn’t go to prison for selling illegal alcohol, or murdering his rivals. He went to prison for income tax evasion on the alcohol sales.
Gifts are not taxable to the person who receives them. The annual exclusion for 2020 is $15,000. Go above that and you are required to file a gift tax return. What’s really crazy is if you go above the life time exclusion, currently $11,180,000, you or your estate has to pay up to 40% in gift taxes. It’s a complicated bit of the tax code that doesn’t affect most of us, but it does exist.
And I hope Confidential does a write up on the sweeper side hustle! It does sound interesting.
Crazy about Al Capone!! More proof yet again that the IRS doesn’t F around…
A few years ago, I won some prizes on The Price is Right. I knew I had to pay taxes on it. I thought I gave my tax preparer my document. Apparently, I didn’t because I ended up getting audited two years later and had to pay the IRS back taxes on the winnings.
Was the experience at least fun and worth it?? :)
I feel like that’s a story you can talk about until the final days, haha..