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Tuesday, July 29, 2008

Sweepstakes winner .... or loser?

Every once in a while, I enter sweepstakes. Recently wanted to find out about the tax implications of winning a sweepstake. As happens with most of the money we all get, IRS wants to make sure it gets it share - the same principle applies to sweepstakes winnings which are taxable. What's worse is that sometimes you may have to pay taxes even if you don't make use of the award.

As per article by Ric Edelman, a winner of a TV game show accepted the offer for a cruise worth $8,000. However, as her husband fell ill, she couldn't take the trip. Unfortunate? Yes, but what was a double-whammy for her was that in January, the TV producers sent her 1099 for the value of the trip. Result? She owed federal and state income taxes.Why?

She agreed to go, and that’s what triggered the tax liability; the fact that she didn’t go is not the producer’s (or the IRS’s) problem.

People who win raffles, lotteries, and prizes on game shows often don’t realize that their winnings are considered to be taxable income. Worse, when the prize is an appliance, car, furniture, or vacation, the producer issues a 1099 based on the full retail price, even though the item can often be purchased from retailers at a substantial discount.

Before accepting a prize, make sure you truly want it. Is it worth the taxes you’ll have to pay? If yes, be prepared to receive a 1099. But before you pay the tax, shop around and obtain quotes for the actual fair market value, for this figure will often be less than the manufacturer’s suggested retail price (which is likely the basis for the amount on the 1099). By enlisting the aid of a talented tax advisor, you’ll be able to reduce the tax liability on that prize.

Ric Edelman sums his opinion on entering sweepstakes etc pretty well when he says:

I hope you can “afford” to win

For details, see::

Ric Edelman: Should You Accept the Prize You Just Won?

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posted by Ruby @ 9:26 AM

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