I Won a $45,000 Car in the Raffle and Now I Owe $14,000 in Taxes. ‘Does This Sound Right?’
Being selected for a raffle is exciting, whether you win a gift card, concert tickets, vacation or other prize. But once you’ve made your winnings, the last thing you probably want to think about is the taxes you’ll owe.
It is important, however, that you do it. Otherwise, you could end up with a surprise tax bill. Such is the case with a user who recently posted on the r/tax subreddit that he, along with his wife, won a $45,000 car in a raffle and now owe $14,000 in taxes. “Does this sound good?” the user wrote. “Thanks for winning the car but now the 45k car has turned into me writing a check for 14k” – a $14,000 check they didn’t expect to write.
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Pro tip: Check the fair market value
To answer the user’s question, this sounds right; rewards are taxable on ordinary income.
“Generally, the US federal government taxes prizes, prizes, sweepstakes, raffles and lottery winnings, and other similar types of income as ordinary income, regardless of amount,” according to H&R Block’s website. “Your state will pay the tax on the winnings, unless you live in a state that doesn’t pay state-level taxes.”
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Your income will determine your tax rate. Here’s an example from H&R Block: “If you make $42,000 a year and file as a single, your tax rate is 22%. But it’s possible that your winnings could put you in a higher tax rate, which is something you should be aware of before filing your taxes.
TaxAct has a lottery tax calculator you can use to estimate how much you will owe in taxes. You must enter the value of your prize and state.
For cash prizes, the process is more straightforward. But with a prize like a car, the amount of taxable income is determined by the fair market value (FMV).
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“The prize payer, as the contest sponsor, is responsible for determining and reporting the FMV to the winner and the IRS,” according to the team at LegalClarity.org. But there is a catch: “If the winner believes that the stated FMV is inaccurate, they must demonstrate a lower value using qualified tests or similar sales data.”
A couple may be able to reduce the amount of taxes they will owe if the FMV is actually lower than what the awardee says. You can get an estimate online through sites like Kelley Blue Book and Edmunds.
They could also sell a car. While that won’t change the FMV, it can free up money to cover taxes and put in some cash.
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