A New Twist for Your Favorite Game Show

We all have our favorite game shows such as Wheel of Fortune, The Price is Right, or Deal or No Deal, and we love to have the contestants win big. Often, the game show host will ask the contestants what they would do with the money. The response is usually to go on vacation or buy a house or car.

We seldom, if ever, hear anything about giving the government part of the winnings. But after all the celebrating is over, the game show will issue the winning contestant a 1099 for the amount of the cash and fair market value of the prizes won, which is taxable on the contestant’s state and federal tax returns.

If a contestant wins cash, they just need to set aside enough of the cash winnings to pay their taxes. The amount of the tax will vary by individual, based on their tax bracket and the state they live in. The federal tax can be as high as 35% and some states as high as 10%. Most individuals who are contestants on these programs are probably in the 15 to 25% federal tax brackets and 2 to 5% state. Thus, on average, the tax on the winnings will be around 22%.

But what happens to the contestant that wins a prize? They will be taxed on the fair market value of the prize, which is usually the full retail value. The winner ends up having to dig into their pockets to come up with the cash to pay the taxes. And, if the contestant wins something they have no use for, they are still stuck with the taxes unless they refuse the prize or contribute the prize to charity.

Let’s talk about the individual with limited means that wins an $80,000 vehicle. It might cost them well over $17,500 (which they probably don’t have) just to pay the income taxes on the prize, not to mention the problems it creates for their parents who usually claim them as a dependent.

Thinking about the taxes involved with winning a prize can add a new twist to watching your favorite game show. Please call our office if you find yourself in this situation.

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