Won a New Car? 8 Ways to Afford the Taxes on Your Prize

Worried About Paying Taxes on a Car Prize? Here's How to Do It

Winning a new car is a dream for many sweepstakes fans. However, if you've won a car or are interested in winning one, you should know that it can turn into a nightmare if you aren't prepared to pay taxes on your prize.

In the United States, you are required to pay taxes on sweepstakes prizes, which are treated as income for tax purposes. That means you'll be required to add the fair market value of your prize when you report your income to the IRS.

The amount you'll have to pay once you've won a car depends on your circumstances, but you can estimate taxes to be somewhere around 1/3 of the prize's value. So if you win a vehicle worth $30,000, you can expect to pay around $10,000 in taxes.

A $30,000 car for $10,000 is a great deal, but it can still be a challenge to find ten grand in your budget. 

Don't think you can afford it? Before you decline a car prize because of what you'll have to pay on it, here are eight ways to make those taxes more affordable.

Consult With a Tax Professional

Meeting with an Accountant
An Accountant Can Help You with the Taxes on the Car You Won. PeopleImages.com / Getty Images

The first thing that you should do after you win a new car (or any other large sweepstakes prize) is to consult with a tax professional. This should be done as soon as you receive the win notification to give you the earliest start possible on preparing for your taxes. Your CPA or accountant can give you advice that is tailored to your specific situation, which is vital to ensuring that you are properly prepared.

Don't Panic - You've Got Time to Plan

A Man with a Plan
Take the Time to Make a Plan to Deal with Your Car Prize's Taxes. MartinPrescott / Getty Images

Remember that your new car win counts from the day you receive it, not from the date of your win notification. Especially in the case of large wins like cars, it takes time for your win to be verified and your prize to be delivered.

For example, if you receive a win notification in August of 2017 and take possession of the car in February of 2018, then you won't have to pay Federal taxes on the prize until you submit your 2018 taxes - usually in April of 2019. This gives you time to put together a plan and save for your taxes.

Set Aside Money a Bit at a Time

Wooden car jigsaw puzzle, final piece being placed
Put Aside the Money for Your Car, Piece by Piece. Dimitri Otis / Getty Images

You can use the time between the day you find out that you've won a new car and the day you file your yearly taxes to save the money you need to cover the car taxes. Paying thousands of dollars in one hit can be tough, but if you set aside some money in advance every month you might not even notice the loss.

Research the Fair Market Value

New car with dollar price tag.
Make Sure You're Paying Taxes on the Correct FMV. Endai Huedl / Getty Images

Remember that you only need to pay taxes on the Fair Market Value (FMV) of any sweepstakes prize, including a new car. The FMV could be far lower than the Approximate Retail Value (ARV) listed by the company giving away the prize, especially if it takes a while for you to take possession of the vehicle.

Car values drop after the new car models come out each year, so that 2007 model you won might be less expensive when you take possession in 2008. Make sure that your taxes are fair and accurate by finding the lowest possible FMV.

Maximize Your Deductibles

1099 tax form, US currency, calculator
Maximize Your Deductibles to Lower the Taxes on the Car You Won. Geri Lavrov / Getty Images

Look over your finances carefully to see if you are eligible for any deductions or credits that could reduce the tax burden on your new car win. This is something that you should discuss with your tax adviser.

Get a Secured Car Loan

Man working on car loan application
A Secured Loan Could Be an Affordable Way to Pay Taxes After Winning a Car. Tammy Hanratty / Getty Images

With a brand new car in your possession, you can usually get a very generous interest rate on a new car loan. Since you'll only be paying for the taxes and not for the full value of the car, you can have lower monthly payments and pay off your loan more quickly with a new car win than any regular car loan.

Sell Your Old Car

Car Key with For Sale Tag Isolated on White Background
Selling Your Old Car Is a Good Way to Raise Money for Taxes. EHStock / Getty Images

Now that you have won a spiffy new car, you don't need your old one anymore, right? You can sell your old car and put the money that you receive toward paying the taxes on the new one. This can defray some or all of the costs of winning a new car, and could even net you a profit.

Sell Your New Car

New Car Winner
Selling Your Car Prize Could Pay Off Your Taxes and Leave You With a Pile of Cash to Boot. otisabi / Getty Images

It may be heartbreaking to contemplate, but selling your new car win could be an intelligent way to cover the taxes.

Many dealers will buy back a new car prize for a good price before you drive it off their lot; after all, they know that the car is in pristine condition.

You can end up with enough money to pay the IRS and still have thousands left over to buy a less expensive car or to use for other purposes.

Stay Safe When Paying Sweepstakes Taxes:

Taxes are a legitimate cost of winning sweepstakes prizes. But remember that you always pay your taxes directly to the IRS. If a company tells you that you've won a car and then says you need to pay taxes to them before claiming the prize, they are trying to scam you. You shouldn't have to pay anything to claim a prize: not taxes, not processing fees, and not fees to clear customs. Click the link above for more warning signs of sweepstakes scams.