To win a new car
is a dream for many sweepers. However, a new car prize can be a nightmare if winners don't prepare themselves for a tax hit. The amount you'll owe depends on your circumstances, but you can estimate taxes around 1/3 of prize value. If you win a new car worth $20,000, you can expect $6,000 in tax.
A $20,000 car for $6,000 is a great deal, but it's still a challenge to find six grand in the budget. Here are some tips on affording the taxes so that you can enjoy your new car win.
1. Consult with a Tax Professional
The first thing that you should do after you win a new car (or any other large sweepstakes prize) is to consult with a tax professional. This should be done as soon as you receive the win notification, to give you the earliest start possible on preparing for your taxes. Your CPA or accountant can give you advice that is tailored to your specific situation, which is vital to ensuring that you are properly prepared.
2. Don't Panic - You've Got Time to Plan
Remember that your new car win counts from the day you receive it, not from the date of your win notification. Especially in the case of large wins like cars, it can take quite some time for your win to be verified and your prize to be delivered.
For example, if you receive a win notification in August of 2007 and take possession of the car in February of 2008, then you won't have to pay Federal taxes on the prize until you submit your 2008 taxes - usually in April of 2009. This gives you time to put together a plan and save for your taxes.
3. Set Aside Money a Bit at a TimeYou can use the time between the day you find out that you've won a new car and the day you file your yearly taxes to save the money you need to cover the car taxes. Paying thousands of dollars in one hit can be tough, but if you set aside some money in advance every month you might not even notice the loss.
4. Research the Fair Market Value
Remember that you only need to pay taxes on the Fair Market Value (FMV) of any sweepstakes prize, including a new car win. The FMV could be far lower than the Approximate Retail Value (ARV) listed by the sponsor - especially if it takes a while for you to take possession of the vehicle. Car values drop after the new car models come out each year, so that 2007 model you won might be less expensive when you take possession in 2008. Make sure that your taxes are fair and accurate by finding the lowest possible FMV.
5. Maximize Your Deductibles
Look over your finances carefully to see if you are eligible for any deductions or credits that could reduce the tax burden on your new car win. This is something that you should discuss with your tax adviser.
6. Sell Your Old Car
Now that you have won a spiffy new car, you don't need your old one anymore, right? You can sell your old car and put the money that you receive toward paying the taxes on the new one. This can defray some or all of the costs of winning a new car, and could even net you a profit.
7. Sell Your New CarIt may be heartbreaking to contemplate, but selling your new car win could be an intelligent way to cover the taxes. Many dealers will buy back a new car prize for a very fair price before you drive it off their lot; after all, they know that the car is in pristine condition. You can end up with more than enough money to pay for the taxes and still have thousands left over to buy a less expensive car or to use for other purposes.
8. Get a Secured Car Loan
With a brand new car in your possession, you can usually get a very generous interest rate on a new car loan. Since you'll only be paying for the taxes and not for the full value of the car, you can have lower monthly payments and pay off your loan more quickly with a new car win than any regular car loan.