April 26th, 2010
Prizes, Taxes, & 1099 Forms
Taxes on that prize? No one ever told me… When that 1099 tax filing arrives in your mailbox and you don’t remember where it came from or why it was sent to you, think back for a moment.
It could likely be from a prize you won in a sweepstakes the prior year. Prizes over $600 are considered miscellaneous income to the government and sponsors are required by law to issue a 1099 form to winners who receive a prize (or multiple prizes) valued over $600.
If you read the Official Rules of a promotion before entering, it will clearly identify the value of your prize so you know what tax burden to expect. Sometimes this is identified as the “ARV” or Approximate Retail Value of the prize which is what the sponsor estimates the prize to be worth (based on the fair market value at that time). Once you receive your prize the actual value of the prize can then be determined and a proper 1099 form can be issued. For example, if the prize is a trip to a high profile event, the “ARV” may be estimated at $5,000 based on the ticket cost, hotel, and airfare but keep in mind the sponsor does not know where the winner resides. So, if you are the winner and live in New York and the event takes place in New York, the travel costs may be significantly lower given you will not have to utilize airfare, thus the actual retail value of the trip will be lower as a result.
The same holds true for electronics. At the time of the sweepstakes a television may have a certain value but by the end of the program it may be a lower value since a newer model may be available.
So, just enjoy your prizes and remember, “there is no such thing as a free lunch” when taxes are concerned.