The tale of what has happened to ‘Survivor’ Richard Hatch has a moral just as applicable to winners of ‘The Price is Right’ and audience members on shows like “Oprah” and “The Ellen Degeneres Show”. Whether you win a cool million like Hatch or just walk away with a year’s supply of Turtle Wax car wax on the old “Let’s Make a Deal”, you have to pay federal income taxes on your winnings. Sometimes, as was the case with “Oprah”, the giver of the gift can agree to cover the recipient’s tax liability. Really the use of the word gift is a misnomer.
The Internal Revenue Code has as its very foundation the definition of income under section 61. Any accession to wealth is income for tax purposes.
As between prizes awarded as cash and prizes awarded as merchandise (i.e., cars, vacations, refrigerators, and yes, Turtle Wax for life), the preference is obviously for cash. But you need to be aware of your obligations to the IRS up front. A cash award should be immediately segregated into the amount you are going to get to keep – what you will net – and the amount you will be paying in tax.
Let’s say you win a game show prize of $1,000 (you froze on “Millionaire”). If you’re in a 30% tax bracket, then generally, you’re good to go come April 15 (or earlier if you have to pay quarterly estimates of tax liability) if you’ve put away $300 for taxes and went hog wild with the remaining $700. Even better for you if you win the prize on April 16 and can put away less than $300 in an interest-bearing account that will amount to $300 by the following April 15. Of course, you need to consider that the interest you earn in a bank account is itself taxable so you’ll need to invest enough to yield $300 plus whatever the tax on the interest is going to be. But you get the point.
With prizes awarded as something other than cash – a vacation, a new car, the average “Price is Right” Showcase, for instance – your options aren’t great.
Sure remember that you may be getting a new washer/dryer, but it’s best to think of it not as free but at a significant discount. If you win a washer/dryer, you have to report its value as gross income for federal tax purposes. If you can’t afford the taxes, often the only option is to sell the prize so you can use the cash to pay the taxes and hope that you can sell it at a high enough price that you get to keep some of the money.
We learned a few new things from the Hatch trial – ignorance may be its own reward on reality TV, but ignorance of the law is still no excuse. Absent a written document between the production and yourself that says they will pay the taxes on your prize, you can forget about relying on your own assumptions because the law always presumes that your tax liability is your tax liability and no one else’s.