Taxes You Can Expect to Pay on Prizes and Sweepstakes
There’s no such thing as a free lunch. And there are costs to winning—costs like paying taxes on prizes and sweepstakes. Understanding the basics of how these taxes work will help you avoid scams and pick giveaways that are worth your time to enter.
Believe it or not, U.S. residents must declare the value of sweepstakes prizes on their taxes as part of their income. This “income” is recorded on the 1040 form and submitted with your regular tax return; non-monetary sweepstakes prizes should be declared on your taxes as "Other Income." Your state may impose a state-level income tax on the winnings, too. Now, the value that you report for your non-monetary winnings may require a little investigation on your part because you will pay tax on it based on its fair market value (FMV), not the sponsor's advertised approximate retail value (ARV). It should be noted that vacation prizes often have a higher ARV than the true FMV, so make sure you’re paying taxes on the correct value!
While you pay the income tax on a sweepstake directly to the IRS, the additional taxes for vacation prizes (e.g. port or airport taxes) are either covered and paid by the sponsor or collected by the sponsor to be paid to the proper authorities.
The rules of any legitimate and legal sweepstakes, raffle, lottery, or other winnings program should include which taxes are and aren’t covered by the sponsor(s). If a company requires you to pay them the owed taxes up front before you receive your prize or if their official rules do not address tax liabilities, it should be a red flag and you should probably walk away from the offer because it’s most likely a scam.
Vacation prizes and sweepstakes
Vacation prizes and sweepstakes often include trips to luxurious destinations, unique cultural experiences, vouchers for free or discounted activities, and/or a cash payout. While all of these options give you, the winner, a better deal than you would have gotten had you paid full retail price, they are not completely free vacations.
Fees and taxes you may still need to pay:
- Port taxes on cruises
- Room taxes for hotel stays
- Airport taxes (like the 9/11 security tax, fuel taxes, etc. for flights)
Before you accept and book your once-in-a-lifetime sweepstakes vacation, be very clear on what costs you are expected to pay. Ask about baggage fees, tips, meals, alcohol, transportation, flights, and travel insurance costs.
Prize money is taxed as a source of income. The tax rate is determined by your income. It’s possible that a prize could bump your income into a higher tax bracket. Sometimes the payer of the prize money will withhold income taxes on the amount for you. If you win a large amount of prize money, it’s not a bad idea to hire a tax professional to help you determine just how much you owe on your winnings and if it affects your other tax liabilities.