Winning big has its drawbacks. If you're planning an appearance on Wheel of Fortune, or any game show for that matter, understand the tax consequences of hitting the jackpot.
From The $64,000 Question to Don't Forget The Lyrics, game shows have long been worthy primetime contenders. Apparently, the idea of watching regular folks win big bucks is appealing to the masses. Unfortunately for the winners, the IRS is watching right along with the television audience.
Sharing with the IRS
Between now and April 15, there might be a few hundred former game show contestants scratching their heads. If they didn't know already, the 1099-MISC they receive will surely tell them: The IRS, and possibly their own state tax board, gets a piece of their winnings.
Game show winnings in excess of $600 in one year are taxed as income. This rule applies to cash winnings, as well as merchandise prizes. Don't think you can get away without reporting it. Just ask Richard Hatch, who won $1 million on Survivor. He was taken into custody in 2006 after the courts found him guilty of tax evasion. Lesson learned-always create an alliance with the IRS.
A savvy winner can manage the tax burden associated with cash prizes by tucking away a good portion of the booty. Conventional wisdom says to be conservative and plan for a tax bill of a whopping 50 percent of those winnings. Lock up that 50 percent in a low risk deposit account until Uncle Sam's bill is due.
For winners of non-cash prizes, tax implications get complicated. Game shows report merchandise winnings to the IRS at fair market value of the items won-which means that the lucky contestants have to report that same fair market value amount as taxable income. In other words, if Drew Carey awards you a new flat-screen LCD TV worth $1,999, plan to reach into your own pocket to pay taxes on that prize. If you're in the 31 percent tax bracket, your federal tax bill for that TV will be about $620. That's a big price tag for something that was supposedly free. Sometimes, the price isn't always right.
Sharing with your state
State taxes might add even more to the cost of that free item. Unless, of course, you reside in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, where you're off the hook, because they have no income tax. For the 2007 tax year, the remaining states have tax rates ranging from 1 to 9.35 percent, depending on the income level of the taxpayer. This can add anywhere from $20 to $187 to the tax liability associated with that TV. A high income Californian, for example, may end up paying more than $800 in federal and state taxes on that prize.
If you dream of making your primetime debut on a game show, pick one that pays out prizes in cash. That way, you won't have to sell something just to pay for the stuff that you win.