Taxes On Contest Winners
REM #F653
By Ilyce R. Glink
Summary: A reader is wondering what the costs are if you win a home in a contest. Ilyce explains that the house will be considered income, thereby dramatically increasing your income tax for the year.
Q: What are the pros and cons of winning a home in a contest?
How much would it actually cost you in the long run, and are you better off
taking the money or the home?
A: When you win a contest, it's like winning the lottery. You get the goods
but you have to pay tax on your winnings as personal income rather than capital
gains. The difference can be pretty dramatic in terms of taxes owed.
For example, if you win a house valued at $200,000, and you decide to keep the
house rather than taking a cash payment (if one is offered), you would have
to declare the $200,000 value of the property as income in addition to your
regular annual income. That would probably push you to the top tax bracket,
which is currently 35 percent for federal income taxes plus whatever your state
tax would be.
On $200,000 of income, you would then pay about $70,000 in taxes to the federal
government plus state tax. While you may have deductions, you might also fall
victim to the Alternative Minimum Tax (AMT). If you don't happen to have $70,000
in cash, you could be in trouble with the IRS.
That's why so many people decide to take the lump sum cash payment. At least
this way, you have the cash to pay whatever taxes might be owed.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO
Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted,
resyndicated or redistributed without written permission from the publisher.
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