How often do you get an email about or read a post on social media about a competition where the prize is an all expenses paid trip to somewhere fantastic? I feel like I see these kinds of offers shared on social media several times a week. Last summer, I was one of the lucky ones - I won a last-minute weekend trip to Bermuda with UBER. The trip itself was everything I expected it to be: pink sand beaches, colorful cottages, and friendly locals. One thing I didn't expect? The impact it would have on my 2016 tax return.
When you win any prize, you are responsible for paying taxes on the cash value of the prize. Even Olympic athletes pay taxes on their medals. Some companies will have you complete tax paperwork, while others might go around by classifying it as a gift. However, as the tax payer, the IRS expects you to declare all prize winnings greater than $600 each year, even if you don't receive a 1099 form from the prize sponsor.
Based on the experience I went through this past February, here are some tips to avoid getting burned during tax season the next time you win big:
Pick and choose the contests you enter carefully.
A luxury all-expenses paid vacation is going to have a high retail value. If you're not prepared to pay the taxes on the value of that kind of a trip, aim for contests with prizes that are physical objects (so the retail value is easily determined), or, aim for trips that can be awarded in your own city or state.
Find out the total amount of your prize winnings as soon as you win.
Ask the sponsor for a breakdown of what exactly you have won and how much each component costs. Keep in mind, they may have received some of the materials at a discount (or even for free), so what they tell you isn't always totally accurate. If they aren't so forthcoming, keep the emails as record that you tried to obtain this information.
Keep receipts and quotes from everything that is included with your prize.
Win a flight? Do a flight search for the exact same dates and same airline and take a screenshot (be sure the screenshots include the page that outlines the fare class plus taxes and fees). Win luggage? Go to their website and take a screenshot of the page which shows the exact same product and what it costs. This will help you when you determine the fair market value of your prize later, during tax season.
Determine the fair market value of your prize.
Review the receipts, screenshots and communications with the prize sponsor. This is the proof that you need in order to determine whether or not the prize is actually worth the same or less than what the sponsor has claimed on your 1040 tax form. For example, UBER's contribution to my prize package was a $200 ride credit to be used toward airport transfers. I only used $80 of that credit the morning of, and the rest disappeared from my UBER account. If UBER didn't actually give me the $200 credit to use in its entirety, then my fair market value is what I spent: $80.
Don't forget about deductions.
If you have freelance work like I do, you will pay self-employment tax on those earnings, plus write off deductions. You may be able to write off meals and/or transportation (things your prize may not cover) if you can turn the prize into something related to your freelance profession.
No matter how big or small the prize may be, it's so thrilling to win something. The bottom line is, you can't let your excitement cloud your judgement. If you keep these 5 simple tips in mind the next time you win a prize, you'll be prepared to face the repercussions come tax season. Good luck!
This article is intended to be a general resource only and is not intended to be nor does it constitute legal tax advice. My recommendations are based on personal, not professional, opinion only.