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CNBC stock contest: Is winning a weekly prize worse than losing?

If it's late spring, it's time once again for the CNBC stock trading challenge. First prize is $500,000 and the runner-up wins $250,000. Even after taxes, that's a lot of money.

But the non-cash weekly prizes carry such a hefty income tax liability that I don't think I'd want to win most of them.

If you are in a combined 37% federal and state income tax marginal tax bracket, in week 8 you could win 2 nights in a Bentley (with chauffeur) and pay only $3,700 in income taxes on a prize that retails for $10,000. Because I could rent an ordinary luxury car without a chaffeur for a couple nights for a few hundred dollars, something I'm not inclined to do in any event, I can't imagine why I'd want to rent a Bentley for several thousand dollars, the amount of taxes I would have to pay if I won a "free" prize.

Or you could win week 4's prize of a private jet to Jamaica for a 3-night vacation for only $12,000 in taxes. Because one can be a guest in many of the world's best hotels for under a $1,000 a night, $12,000 for 3 nights seems like a lot to spend for a "free" vacation --- one that comes complete with a 1099 showing income of $32,500.

If your tax bracket is a lot lower, then the tax cost would not be so high, but if you live in NYC or other high-tax locales, you would be paying a much higher amount than would be owed in the 37% bracket I used for my hypotheticals.

What do families do when they win a new house on Extreme Makeover: Home Edition? The producers of that show must pay a mint to build a house in a week; I wonder how generously those houses are valued on 1099s. [UPDATE (from "Another Roger" in the comments below): Extreme Makeover recommends a tax dodge.]

Another Roger:
The producers treat the improvements as the payment for "renting" the home for filming. If it's under 15 days a year, it's tax-free. See here.
5.10.2008 9:55pm
cathyf:
Ok, ignoring the tax dodge, I do remember reading years ago about the prizes on "Wheel of Fortune" and "The Price Is Right". The IRS did recognize that the prize valuations are inflated by those shows, and allowed people to pay taxes based on more realistic valuations.

But, yeah, I've certainly seen prizes which I am totally uninterested in having, and value way less than the income tax would be.
5.10.2008 10:13pm
Bill Poser (mail) (www):
In the case of Extreme Makeover, presumably the impact can be considerably reduced by income-averaging over three years.
Also, in the case of families that aren't just down and out but have a need for special facilities due to, e.g., a handicapped child, isn't that part of the value deductible?
5.10.2008 10:39pm
Brian K (mail):
I was under the impression that, at least for some (most?), prizes like these you can always opt to accept the prize in a cash form. At least that's what a friend of mine was able to do when he was on a gameshow.
5.10.2008 10:41pm
30yearProf:
This is the best resolution. BTW, income averaging was repealed in 1986.


*The IRS now requires raffle winners to pay federal taxes on raffle winnings at the time of the award. The Asheville Symphony will pay to the IRS for the winner's benefit an amount equal to 38.88% of our cost of the vehicle. The tax must be paid not only on the fair market value of the winnings, but also on the tax itself, therefore a grossed up tax rate of 38.88% of the winnings. This may or may not be the actual amount you will owe on your federal taxes. Please consult your tax advisor concerning your specific situation.
5.10.2008 10:58pm
Dave N (mail):
I have no idea if it is still good law or not (since I am not a tax lawyer nor have any desire to be one), but 20 or so years ago when my brother won an automobile in some contest or another. My father (a CPA) advised him to find out the value of the car 3 days off the lot so he had a valuation different (and less) than the 1099 he would be receiving--but also an amount he could defend in the event of an audit.
5.10.2008 11:12pm
LM (mail):
Bill Poser,

In the case of Extreme Makeover, presumably the impact can be considerably reduced by income-averaging over three years.

Am I just hallucinating in remembering income averaging being done away with in the Reagan era reforms?
5.10.2008 11:51pm
stunned:
Hey ya'll, let's be as cranky as possible!
5.10.2008 11:54pm
NatSecLawGuy:
First I had heard of this contest. Thanks for the notice. Clearly I have nothing better to do after finishing my second year of law school than play with monopoly money. AWESOME!!
5.10.2008 11:55pm
Crane (mail):
Just recently, my local paper ran a story about a guy with an Extreme Makeover house who was having trouble continuing to afford it. It wasn't just the taxes, either; the house was so big and fancy that the utility bills were a problem as well. The guy was on record as saying that it was just too much house.

I believe the Extreme Makeover people do give house recipients a lump sum to cover real estate taxes for something like three years, though in this guy's case it didn't help because he had to use the money to pay off prior debts. (Said debts being part of the reason his family was poor enough to qualify for an Extreme house in the first place.)
5.10.2008 11:58pm
stunned:
@Crane: screw the poor, amirite?
5.11.2008 12:06am
LM (mail):

I believe the Extreme Makeover people do give house recipients a lump sum to cover real estate taxes for something like three years, though in this guy's case it didn't help because he had to use the money to pay off prior debts.

It's not accurate to say "it didn't help." This guy just robbed Peter to pay Paul.
5.11.2008 12:10am
Smokey:
stunned:

Lots of folks would love to be 'screwed' by being given a free house, amiright?
5.11.2008 2:12pm
Gaius Marius:
I believe the Extreme Makeover people do give house recipients a lump sum to cover real estate taxes for something like three years, though in this guy's case it didn't help because he had to use the money to pay off prior debts. (Said debts being part of the reason his family was poor enough to qualify for an Extreme house in the first place.)

No good deed goes unpunished.
5.11.2008 2:43pm
Richard A. (mail):
The entire theory for taxing lottery winners is flawed, it seems to me. Everyone who buys a lottery ticket gets the same item of value, e.g. a .00005 percent chance of winning a certain amount. In return, that person pays an amount that exceeds the value of that item by a considerable amount.

The combined losses far exceed the combined gains and therefore no tax should be assessed.
5.11.2008 2:50pm
CatCube:
Richard A.:

You can deduct the cost of all your lottery tickets as "expenses" against the win, I believe. I know you can do it in Vegas for large wins, so you should always track your losses.
5.11.2008 3:24pm
Crane (mail):
Smokey - are you familiar with the concept of a white elephant?
5.11.2008 6:26pm
Richard A. (mail):
Yeah, if I ever won the lottery I'd spend the rest of the year at the racetrack picking up losing tickets.
5.11.2008 8:21pm
Brian G (mail) (www):

Just recently, my local paper ran a story about a guy with an Extreme Makeover house who was having trouble continuing to afford it. It wasn't just the taxes, either; the house was so big and fancy that the utility bills were a problem as well. The guy was on record as saying that it was just too much house.


This might be the article that he was talking about.

Also, a few years ago I was working at a radio station and we gave away a Dodge Viper. After the hoopla was over, the guy sponsoring the promotion went over to her and said you can have the keys or this check for 65 grand. Needless to say, she didn't take the Viper home.
5.12.2008 12:03am
BGates:
The entire theory for taxing lottery winners is flawed, it seems to me
I thought any government's entire theory for taxing anything was, "we want some of that".
5.12.2008 1:37am
David Schwartz (mail):
I think the rent argument is defensible. This is not the generic renting of a generic house, but the renting of a house that is specifically useful for a specifically profitable purpose. The show, presumably, makes money. It could not do so without the use of the house.

I don't see why the rent must be the "fair market value". Suppose I have no desire to sell my car, but some crazy person really wants my specific car for some reason. Maybe the VIN is his lucky number. If he's willing to pay me ten times what it's worth, you can damn well believe the government is going to want me to pay taxes on what he paid me, not "fair market value".
5.12.2008 11:14am