Won a New Car? Watch Out For Taxes.

Winning a brand new car is a dream for many who spend their days watching TV game shows or entering sweepstakes. Once that dream comes true, however, reality is soon to set in. There’s no such thing a free lunch, or a free car, and sooner or later the tax collector comes calling.

In the United States, any item won in a sweepstakes is taxes by the IRS at a high rate. Winning a car isn’t like winning cash – you can’t just set a portion of it aside for taxes. And most people hoping to win a car don’t have a large chunk of change just sitting around. So what can you do to prepare for the tax burden of winning a new car?

First things first, talk to a tax professional after you’ve won your new car, if possible before you take possession of it. This can give you the foresight to know how winning a car will impact your specific financial situation. If you’re the type of person who normally does their taxes at home with TurboTax coupons, getting professional advice will set you on the right path.

Next, start saving. The tax rate for prizes is typically around one-third, so a $30,000 car could get you a tax bill of $10,000. If you have an older car that the prize car can replace, consider selling that car to offset the taxes. Of course, you might also consider selling the new car. You’ll still have to pay the taxes, but you’ll be able to net the profit.

When it comes to new cars, there is no bigger headache than depreciation. That $30,000 car is only worth $20,000 as soon as you drive it off the lot. But when it comes to taxes, depreciation can be your friend! The taxes you need to pay are based on the Fair Market Value of the car, and not the Approximate Retail Value that may be listed as the prize value. Use this to your advantage, especially if you can wait a while to take possession of the car. As noted above, you should talk to a tax professional sooner than later to get the best information about your particular financial situation.

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