The excitement of winning a prize can fade quickly when the reality of paying taxes on it comes into play. In the US, the Internal Revenue Service counts contest and sweepstakes wins as part of your gross income. Two important items you need to know about when keeping records of prize winnings are the approximate retail value (ARV) and the fair market value (FMV) of the prize.
The ARV is what the company or organization that ran the sweepstakes values the prize at. This is sometimes called the manufacturer's suggested retail price (MSRP) and is usually listed in the sweepstakes rules. Cash winnings are easy to value as they have an obvious face value. But it will work to your advantage to assess the FMV of a non-cash prize before you file your tax return. This is the current market value that you could sell the prize for and what you would include in your tax information. For instance, if the sweepstakes sponsors value the prize at $20,000 but the FMV is actually $17,000, then $17,000 is what you want to claim as part of your gross income.
There are several ways to ascertain the FMV. First, ask the prize sponsors. They most likely have purchased the prize at a discount and will be willing to help you with tax information. In the case of a trip, call around to travel agencies and ask if they will give you an estimate for the cost of a trip comparable to the prize. You can do the same with a vehicle. Ask the sponsor what they paid and/or call around to dealers and find out the current value of the car. Keep advertisements put out at the time of the prize win to show the IRS if you need to. The same goes for other prizes. Check store ads and online for the current value and print out the ads to keep for your records.
It may seem like homework, but treating winnings like income as soon as you receive them will help save you tax headaches in the long run. This advice is meant to help you with record keeping. Please seek professional tax help for specific info on how to add sweepstakes winnings to your tax return.
Tax Issues - Valuation of Sweepstakes and Contest Prizes. Cowan Silverman Rowan LLP, 2008. http://promolaw.com/resources/tax_issues.htm