We sweepers tend to pooh-pooh the old saying, “there’s no such thing as a free lunch.” After all, we get things for free all of the time. But depending on where you live, even those free prizes might have a price.
In the United States, sweepers are required to pay taxes on their prizes (I believe that lucky Canadians do not have to pay taxes on sweepstakes prizes — which is nearly enough to make me think about moving north!). While I’m not an accountant, I’ve learned a lot about sweepstakes taxes over the years I’ve been entering and winning. So here are the 4 most important things you need to know about sweepstakes taxes, if you live in the US:
1. Your Prizes are Treated Like Income
It might not seem fair, but you treat the value of your sweepstakes prizes as if you had been paid the amount of their value by an employer. So even though there’s a big difference between winning a $10,000 vacation and having an extra $10,000 in your pay check, the IRS treats both cases similarly. So it’s worthwhile considering whether you’re willing and able to pay the taxes on the prizes before you enter sweepstakes.
For more information about how you declare your prizes, see How To Pay Your Sweepstakes Taxes.
2. There Is No Minimum on the Prize Value You Need to Declare
There’s a common sweepstakes myth that you don’t have to pay taxes on prizes worth less than $600. Unfortunately, it’s not true. While sweepstakes sponsors are must send a 1099 form for prizes valued at $600 or above, you are legally required to declare your prizes on your taxes, whether you receive a 1099 or not.
For more information, see Do I Have to Pay Taxes on Prizes Worth Less than $600?.
3. You Do Not Necessarily Have to Declare the ARV in the Sweepstakes Rules
The ARV that’s listed in sweepstakes rules is an estimate of the prize’s value; the actual value can vary. You are required to pay taxes on the fair market value of the prize when you receive it. It’s entirely possible that your prize might be worth less when you receive it than when the rules were drafted, or that the ARV doesn’t quote the best possible price. If you can find a lower advertised price for your prize, you can declare that value on your taxes.
For more information, see How to Dispute an ARV on Your Sweepstakes Taxes.
4. You Always Pay Sweepstakes Taxes to the IRS
Many sweepstakes scams tell people that they’ll receive their prize right after they pay “taxes” to the scammer. This seems believable, because when it comes to gambling, you do sometimes need to pay taxes before your prize is paid out. However, sweepstakes taxes work differently from gambling. You don’t pay taxes to sweepstakes sponsors, you declare your prize value on your regular tax forms which you submit them to the IRS. You never need to pay money to a sponsor to release your prize.
For more information, see Warning Signs of Sweepstakes Scams.
By keeping these four tips in mind when you enter sweepstakes, you can ensure that you are following the law about sweepstakes taxes, without overpaying or falling prey to any tax-related scams.
Please remember that this is not intended to be legal advice. For information about your specific legal situation, consult with a tax advisor who is familiar with sweepstakes laws in your area.
Other Interesting Posts:
Reading the Rules and Finding Hidden Treasures
Affidavits: Can I Please Have Your Signature?
The Top 5 Must-Read Books for Sweepstakers
