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All About Sweepstakes Taxes

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If you live in the United States, you are required by law to pay sweepstakes taxes on all of your prize wins. Legally, this includes everything from grand prize wins like cars and dream houses to smaller prizes like t-shirts and baseball caps. Find out what to expect from sweepstakes taxes and what you should do to prepare for them.

1. When Do I Pay Taxes?

You are only obligated to pay taxes when you receive a prize. So if you are notified of a win, but it never arrives, you do not need to pay tax on it. If you are notified in 2007 that you have won a new car, but you don’t actually get your hands on it until 2008, the taxes are due for the 2008 tax year.

2. What if a Prize Value is Inflated?

Taxes are due on the Fair Market Value (FMV) of a sweepstakes prize. The FMV is the price that you could expect to pay if you bought a similar product on your own. The FMV can vary from the ARV listed in the sweepstakes rules.

For example, a digital camera might have been worth $500 when the sweepstakes began. However, by the time you actually receive the prize, it could be selling in stores for only $350. If you can prove that the true FMV is $350 by collecting sales brochures or newspaper advertisements for the product, you will only have to pay taxes on the $350. You can then dispute the ARV on your taxes.

3. How are Taxes Paid?

Taxes on prizes are paid on your tax forms at the end of the year, just like your regular salary. They are listed as other income and paid at your normal tax rate. It is possible that your prize wins could bump you up into the next tax bracket.

4. Will I Ever Have to Pay Taxes to a Sweepstakes Sponsor?

In most cases, you should never pay taxes directly to a sweepstakes sponsor. Asking for money for taxes before sending a prize is a sign of sweepstakes fraud. If it's a real win, you won't have to pay for it. Be sure to learn about sweepstakes scams and how to recognize them.

Exceptions include vacation giveaways, where the sponsors occasionally collect travel-related taxes like hotel and airport taxes or port fees.

For specific information about paying sweepstakes taxes, visit the IRS website or consult with your tax professional.

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