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.]