Tips On Taxes And Sweepstakes Wins

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Tax season is upon us, making this a good time to pass along relevant information about sweepstakes prize wins and taxes. Most of this information is targeted to US residents. Canadian sweepstakers abide by different laws, and I’ll give a few details on that as well.

All sweepstakes wins are considered income, and they are taxed by the US government the same as other types of prize of chance wins. Examples are lotteries and wins at the casino. The sweepstakes prize sponsor is supposed to provide a 1099 (Other Income) tax form at the beginning of the year to winners of prizes $600 and over. Not all prize sponsors do this. You could win a huge prize and never hear from the sponsor at tax time. Nevertheless, it is the winner’s responsibility to declare the prize on their tax return. Technically, all prize wins are taxable, even small trinkets worth a dollar or two. I doubt most people report little wins like free food coupons on their tax returns, but that’s the tax law in the most technical sense.

When entering sweepstakes and contests such as trips, you’ll see a prize description in the rules or at sweepstakes sites declaring an ARV (approximate market value). Very often the ARV is far higher than the real world value of the prize — double or more. You’re supposed to pay tax on the ARV, yet there is a lot of leeway in this area to lower the ARV and your tax burden.

For example, let’s say you won a trip that includes a cruise and airfare. According to the ARV, the trip is supposed to be worth $5K. If you didn’t take a guest the trip is automatically worth about half as much as the stated value.

Then there’s the issue of FMV, Fair Market Value. Let’s say the same cruise and airfare package is being marketed to the public for $3K. Taking a note of this could mean a tax break for you. If you receive a 1099 for $5K, you could ask the sponsor to issue a new 1099 at the lower rate. Or you could cut out the ad from the paper (or print the online ad), proving the lower value of the prize. As far as the IRS is concerned, both are legitimate ways to lower your tax burden for sweepstakes prizes.

You may be wondering why sponsors overstate the value of the prizes. There’s no one reason. Sometimes they may be looking for more entrants by pricing it higher to imply it’s a better prize than it really is. Perhaps they’re looking for a tax deduction themselves, as prizes are a business expense for companies. It’s a standard marketing procedure for businesses to overstate the value of products, and then prices are lowered in the store. Same with travel and other things you could win.

Canadians have a much better deal than we Americans. After completing a simple skill test, they qualify themselves for prizes and pay no government taxes. The skill testing part that Canadians must complete keeps the giveaway from being classified as a taxable lottery that cannot be run by for-profit companies. So this means that lucky Canucks that win a car, trip or whatever get their stuff without paying taxes to the government.

Fair? I agree, it’s not fair for US residents.

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