Do you avoid entering sweepstakes that offer large prizes because of the taxes involved? Imagine that you've just got that prize notification of your dreams—a car, house or some other big ticket item that you've been fantasizing about, but you know you can't afford the taxes on the prize. Don't turn it down just yet. Here are some things to consider before giving up.
Contest sponsors occasionally will offer a cash prize along with the grand prize item which makes taxes easy to cover. Just remember that you'll have to pay taxes on the cash prize as well as the grand prize.
You and your accountant will have to go over your circumstances but a good estimate to hold back for prize winnings is at least 30 percent of the fair market value (FMV) of the item. This may be lower than the approximate retail value (ARV) stated in the official prize rules so be sure to do your research on this
Another option is to accept the prize but sell it to have enough to pay the taxes and some left over to enjoy. In the case of a vehicle prize, selling the new car may allow you to buy a modest used car and have enough to pay the taxes on the prize, as well as a few months worth of other expenses such as insurance. Or you may want to consider selling your current car to pay the taxes.
Your tax professional will help you figure out any deductions, credits, help you plan saving for taxes or the feasibility of a tax payment plan, though owing isn't the best way to go if you can avoid it.
If none of this seems feasible for you for whatever reason, then turning down the prize is the best option. Many sweepstakers enter sweeps because there are multiple prizes awarded—grand, first, second, etc. They know they can afford the taxes on the smaller prizes. Also, our circumstances may change over the life of the sweepstakes. Some last a year or more. Maybe we have the cash to pay the IRS when we enter the sweep but something happens to make us use our savings by the time the drawing takes place. So it isn't odd to turn down a prize and you don't have to avoid entering contests for big ticket items.
Learn more about FMV and ARV mentioned above in the related article here. Good luck!