Famous Prize Winnings
If you like to watch game shows and enjoy all the excitement that goes with watching contestants win prizes, then you can add another element to your viewing pleasure by considering how the contestants will handle the IRS Form 1099-MISC they receive for the value of the items they won. You may not have thought much about it, but the contestants must pay federal and applicable state income tax on the cash and the value of the goods they win on game shows.
The lucky ones are those who simply win cash. They will have money to pay the taxes—unless, of course, they overlook the tax issue, spend all the winnings, and end up with a tax liability they cannot pay when it’s time to file their income tax return(s) for the year in which they won the money. All that winning excitement turns into a stressful financial problem, and they probably end up wishing they hadn’t won.
But what happens to the contestants who win a prize? They will have more complex issues. They will be taxed on the prize’s fair market value (FMV), which is usually full retail value. So, they will have to dig into their own pockets to come up with the cash to pay the taxes. And if a contestant wins something they have no use for, they are still stuck with taxes unless they refuse the prize or contribute it to charity. But if the item is donated to charity, the prize winner still needs to include in adjusted gross income (AGI) that FMV amount and can claim an offsetting deduction for the contribution only if they itemize their deductions. Having to include the winnings in AGI can cause undesirable tax consequences because various deductions and credits are limited depending on AGI.
Then think about the individual with limited means that wins an $80,000 vehicle. It might well cost them $17,500 or more (which they probably don’t have) just to pay Uncle Sam the income taxes on the prize. Or consider the contestant who wins an expensive trip. Typically, hotel packages are valued by the game shows at their top retail value, not the discounted rates that can be obtained online or through a travel agent. Thus, those who accept the trip may not be able to afford the taxes on the trip, and after a week in paradise, they find themselves in tax purgatory.
The issue becomes a real financial drag for the taxpayer who is unable to pay the tax liability because they end up with failure-to-pay (and perhaps underpayment of estimated tax) penalties and interest that the IRS keeps tacking on until the liability is finally paid in full.
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