If I give away a prize that I won am I responsible for paying the taxes?

[sparkyg]

What is the name of your state (only U.S. law)?Colorado

I am a finalist in a Facebook promotion that has a grand prize of a 4 night/5 day stay in an ocean front suite on Maui with meals, activities, and resort credits included. The value is not stated, but I would estimate that it is around $5000. From my research I have found that if I accept the prize, I will be responsible for counting the value as miscellaneous income and pay the appropriate tax on it. Considering this, and the cost of airfare, nightly local hotel taxes, rental car etc., the "free" suite would be very expensive. I would obviously like to come out of pocket as little as legally possible. My questions are this:

1. If I accept the prize but never use it, will I be responsible for any taxes?

2. If I accept the prize and then immediately give it away to a friend, do they have to pay the taxes? Do I? (the rules do not state that the prize can not be transferred)

3. If the answer to #2 is no, can I be a their guest in the hotel without any legal tax trouble?

 

[tranquility]

1. Yes.
2. No. You have to pay the taxes.
3. You owe the tax as soon as you exert any ownership over it--including gifting it to another. The only way to avoid the tax is to not accept the prize.

 

[sparkyg]

Thanks tranquility.

We are starting to think that the costs will be too high for the 'free' hotel stay. If we win, we are now considering turning down the prize, selling it, or donating it. We want to get maximum value obviously. So I have a few more questions.

1. If I accept it and then sell it, I would set my asking price above the amount of tax owed in order to make a profit. Would I then have to count the entire proceeds of the sale as income and essentially be taxed on it twice?
2. If I ask the resort to donate it on my behalf to a specific charity, can I deduct any of it as a charitable donation?
3. I plan to be on my company United Way campaign team this year so I have a few specific questions on how to best use the prize if I choose to donate it to the UW campaign.
a. If I accept the prize and then donate it to the United Way campaign to be used as a raffle prize, can I deduct the entire stated value as a charitable donation?
b.Would the person that wins it through the United Way raffle be responsible to count it as income and pay taxes on it again?
c.Would it be considered gambling income since it was a raffle? Could they then deduct gambling losses to offset the income?
d.Would it be better to make it an auction item? If so is the winner responsible to pay tax on the stated value or the actual price that they paid?

Thanks in advance.

 

[FlyingRon]

1. If I accept it and then sell it, I would set my asking price above the amount of tax owed in order to make a profit. Would I then have to count the entire proceeds of the sale as income and essentially be taxed on it twice?

You are taxed as regular income on the MSRP of the prize. Unless you sell it for more than that amount, then you don't owe any additional tax.

2. If I ask the resort to donate it on my behalf to a specific charity, can I deduct any of it as a charitable donation?

If the resort donates it, it is not taxable to you, however you do NOT get to deduct it.

3. I plan to be on my company United Way campaign team this year so I have a few specific questions on how to best use the prize if I choose to donate it to the UW campaign.
a. If I accept the prize and then donate it to the United Way campaign to be used as a raffle prize, can I deduct the entire stated value as a charitable donation?

I believe you could. The taxes would be a wash in this case.

b.Would the person that wins it through the United Way raffle be responsible to count it as income and pay taxes on it again?

It would be taxable to that person regardless of how United Way came by the prize.

c.Would it be considered gambling income since it was a raffle? Could they then deduct gambling losses to offset the income?

Most likely.

d.Would it be better to make it an auction item? If so is the winner responsible to pay tax on the stated value or the actual price that they paid?

It would not be taxable to them at all then presuming the auction price would be then considered the FMV.

 

[TheGeekess]

OP needs to check out if the prize is transferable. Many are not.

 

[tranquility]

1. If I accept it and then sell it, I would set my asking price above the amount of tax owed in order to make a profit. Would I then have to count the entire proceeds of the sale as income and essentially be taxed on it twice?

Now things start to get a little fancier. The award is taxed at the Fair Market Value at the time of the award. You will get a 1099 for what the person who makes the award feels the FMV is at the time. If, before you exert any control over it, and sell in a sale where the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts that would be the true FMV and that would be the amount you report on your tax return. That would prevent deals between the parties, or related parties or any other type of skullduggery to trick the tax man. It also would prevent lowering the value due to depreciation (as a car rolling off the lot) or other reduction in value do to the circumstances. So, to answer generally, if you sold the thing in a fair manner, you would have a good case to claim that is the FMV no matter what the 1099 you get says it is. You would be selling the asset for the same amount as you pay taxes on so you would not be taxed twice.

2. If I ask the resort to donate it on my behalf to a specific charity, can I deduct any of it as a charitable donation?

If otherwise a deductible contribution (No benefit to you or to a specific person to a recognized charity.), yes, you can donate it. However, you will still run into a valuation issue. If you get a 1099 for $100 and the charity sells it (or uses it--sheesh) for $50, you better hope they sold it fairly or else you might get a tax on the greater and a deduction for the lesser. Remember, you will take it into income and then deduct it on Schedule A. If you don't normally file a Schedule A, you may very well have a reduction in the value of the deduction as you would give up your standard deduction in return for the itemized deductions. If your income is high enough, you may lose some ratable benefits. (Deducting passive income, putting money in an IRA, various credits.)

3. I plan to be on my company United Way campaign team this year so I have a few specific questions on how to best use the prize if I choose to donate it to the UW campaign.
a. If I accept the prize and then donate it to the United Way campaign to be used as a raffle prize, can I deduct the entire stated value as a charitable donation?
b.Would the person that wins it through the United Way raffle be responsible to count it as income and pay taxes on it again?
c.Would it be considered gambling income since it was a raffle? Could they then deduct gambling losses to offset the income?
d.Would it be better to make it an auction item? If so is the winner responsible to pay tax on the stated value or the actual price that they paid?

FMV on A. Yes on B. Yes on C. FMV on D as described above. If a true raffle, I'd say the price paid. Limit those able to buy or otherwise affect the definition of arms-length sale and it becomes harder.

 

[tranquility]

You are taxed as regular income on the MSRP of the prize. Unless you sell it for more than that amount, then you don't owe any additional tax.

Fair market value.

If the resort donates it, it is not taxable to you, however you do NOT get to deduct it.

That would be exerting control and make it taxable (and deductible) to the OP

I believe you could. The taxes would be a wash in this case.

Probably.

It would be taxable to that person regardless of how United Way came by the prize.

Most likely.

It would not be taxable to them at all then presuming the auction price would be then considered the FMV.

Pretty much agree.

 

[davew128]

You are taxed as regular income on the MSRP of the prize. Unless you sell it for more than that amount, then you don't owe any additional tax.

Disagree. The income is the fair market value, not the MSRP. I had two investment fund managers win cars in a raffle in consecutive years, I can tell you that the real fair market value of the vehicles was roughly 20% less than the amount shown on the 1099-MISC.

I believe you could. The taxes would be a wash in this case.

Not anymore. You presume that a) the OP is itemizing b) has enough AGI to deduct the full amount of the prize and c) the income itself doesn't affect any of the numerous AGI based phaseouts in effect again for 2013 (not to mention the ones for medical and miscellaneous deductions)