What Actually Happens When You Win a New Car in a Sweepstakes?
Giving away cars has become an American tradition: from Oprah’s famous stunt to McDonald’s Monopoly, to your local radio station, to the car being raffled at the mall, there are countless ways to win a new car. Unfortunately, not everyone who wins a new car gets to keep it–or even drive away in it. Why? Taxes.
Nerdwallet reveals that you’ll have to pay income taxes on any prizes worth more than $600. The amount of those taxes will vary based on your income, but federal income taxes can run from 10% up to 37%. State income taxes can be an additional 9%. And the worst thing about a car prize is that it can bump you into a higher tax bracket, so you’ll be paying more on all of your income.
Those rates are no joke. Let’s say you win a $50,000 pickup truck in a sweepstakes. You are looking at a combined federal and state income tax bill up to $23,000!
And income tax isn’t even all the taxes. If you live in a state that isn’t Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, or Wyoming, the car will also be subject to sales tax. It’s a bit more common for sweepstakes organizers to pay sales taxes for a prize before giving it away, so it’s closer to “free.” Oprah, for example, paid the sales taxes on all the Pontiacs she gave to her audience. But you’ll want to double-check sales tax too.
Another downside of a sweepstakes car prize is that you’ll have to pay taxes on the full MSRP. In a regular dealership sale, you may be able to talk the salesperson down to a lower price, paying less out the door and less in taxes down the road. But not if it was a prize.
This sweepstakes “gift” is starting to feel like anything but!
Ever notice that in sweepstakes, they often say “A new car OR $__,____.” The reason they often offer a cash alternative is in case you don’t have the extra money around to pay the taxes. You could opt for the chunk of change, pay taxes on it, then take the remainder down to the dealership and get a more budget-friendly car. Another alternative, if you already own your car, is to sell your old car to settle the tax bill.
Most car giveaway sweepstakes will connect the winner with a local dealership to broker the car sales. If you decide to go the cash route, this dealership could potentially get you into a cheaper model with enough over to pay taxes. But most sweepstakes will make certain that you don’t drive away for your prize until you’ve proven you can pay the tax bill too.