If you shop at Safeway, Albertson’s, Vons or any of the other 10 or so participating stores, you have probably noticed that Monopoly is back. This sweepstakes game boasts dozens of ways to win over $250 million in prizes, varying from free pastries, to new cars, to a million dollars cash. While I’m sure we all day-dream about winning a vacation to Hawaii, who stops to think about the taxes you have to pay on your winnings?
74(a) of the Internal Revenue Code requires inclusion in gross income all amounts received as prizes and awards, unless they fall under specific exclusions, such as awarded in recognition of achievement in fields such as charity, science, art, etc. This includes amounts received in sweepstakes, lotteries, and raffles. When the prize or award is made in goods or services, which many of the Monopoly prizes are, the Fair Market Value is the amount to be included in income. If you win a prize worth over $600, you will be issued a 1099-MISC that states the value of your winnings, which will be reported on your tax return as ordinary income.
Here’s where things can get messy. Let’s say you live in a married household, with taxable income of $75,000. In 2019, your tax rate is 12%. One of the prizes in the Monopoly sweepstakes is a $75,000 Corvette, if you win that you now have $150,000 of income to be taxed at a 22% rate, but no additional cash to help pay for the extra taxes. A household that was originally paying $9,000 of federal taxes now owes $25,105, more than doubling their tax liability (and this is before even considering state taxes).
The truth is that not all are fortunate enough to win a non-cash prize and pay for the taxes without selling it. So, if you are lucky enough to win one of these fabulous prizes, consider asking if they have a cash option instead. But let’s be realistic, none of us are going to win anyways.
Contact us with any of your tax questions and concerns.