Imagine you’ve made it to the final Tribal Council on Survivor. It’s time to determine the winner, and host Jeff Probst keeps pulling slips bearing your name. Finally, he announces that you are the champion. Congratulations, you just won… $580,000!
Wait a minute, Jeff. Hang on. Isn’t that prize short a few hundred thousand? I ate rancid sheep guts. I passed out from exhaustion. I earned my million bucks.
Nope. As the first Survivor winner, Richard Hatch, discovered through convictions and prison time, even if you win a prize on television, Uncle Sam counts it as taxable income. How much you’re taxed depends on your income and the state you live in (because if your state levies income taxes, it will want its bite, too). However, it’s safe to say that you’ll lose nearly half to the taxman. If you want to survive on Survivor winnings for 20 years, you’ll have to budget less than $30,000 a year after taxes.For shows with $500,000 prizes, such as Big Brother, the tax bracket is lower so the scale slips, but you still only come away with about $375,000. (CBS reps for The Amazing Race and Big Brother did not respond to WalletPop’s requests for prize information.)
Contestants can’t claim ignorance. The tax information is in the fine print of the contract they sign when they first appear on the show. At one of Hatch’s trials, Survivor’s producer, Mark Burnett, got on the stand and confirmed that when contestants sign their contracts, they agree to pay taxes on their winnings. Subsequently, Hatch went to jail.
In 2007, eagle-eyed fans at the TV news site RealityBlurred.com freeze-framed the payout terms of NBC’s America’s Got Talent and discovered the prize, repeated on television as a million-dollar award, actually came with plenty of strings attached. One of which was that the contestant could choose to receive the prize in the form of a financial annuity paid out over forty years, or they could choose to receive the present cash value of that annuity.
An annuity is designed to pay over time and isn’t worth as much if you cash out early. Reality Blurred’s accountant calculated that if a winner took the prize annually, it would pay about $25,000 for 40 years, but if he wanted his winnings in a lump sum, it would only yield $450,426, or about $375,000 after taxes. That’s about one-third of the promised million bucks. In fact, it’s close to what you’d get if you won a $500,000 prize as a one-time payment.
Uncle Sam wants you to win all types of prizes, not just cash
According to a representative at Wheel of Fortune, contestants are told the following: “Unless forfeited, all winnings are considered taxable income and will be reported to the IRS. You will receive a “1099” in whichever year you actually receive your cash. You will receive a “1099” for both your cash and prize(s) at the same time, regardless of when you take receipt of cash.”
So if you get a vacation that’s valued at $10,000, you have to pay tax as if you got a check for $10,000.
The issue is compounded by the fact that many prizes’ value are named at best-case rates. Lots of times, the hotel packages named on the big shows can be purchased online or through a travel agent for much less than the price named on TV. Vehicles, too, are usually listed with their sticker price, and not for their actual market value. Winning a car and being required to pay $7,000 in taxes is still much better than buying one yourself for $27,000, but highest-case pricing increases the tax burden.
You also have state taxes to contend with. Most game shows are shot in California, which means California tax rules apply. For Wheel of Fortune, like its corporate cousin Jeopardy!, the rule is that California state taxes have to be deducted from a non-resident’s winnings before the check gets mailed.
Although it would be considerate for shows to pay for the tax costs associated with the prizes — the rare “after tax” payout — it’s not in their financial interests to do so. Because of the way the hotel package ends up as a prize — it’s sometimes given to the show in exchange for promotion — the dollar value is inflated to give both the show and the donor the sheen of maximum value.
Viewers should also listen carefully for the terms of the gift. In 2005, when the Bransen Family won a leg on the dreadful “family edition” of The Amazing Race, host Phil Keoghan said they had won “free gas for life” at BP stations. He never said “unlimited,” and that was important, because in fact the prize awarded only $1,200 a year for 50 years. Even though that adds up to some $240,000, in fact, it only gave “some” free gas for life. The words said on the broadcast were accurate, but the impression was different.
A few shows pay out their jackpot so rarely that they don’t even keep the prize money in the bank. No show will go on record to admit it, but common knowledge in the industry holds that some shows with extravagant grand prizes contract with specialized insurance policies which pay out only in the rare event that their biggest prize is awarded to a contestant.
On shows where prizes are doled out as a matter of course, the prizes are usually funded either through promotion or through part of the show’s standard operating budget. Regardless of how the prize got to you, though, it must be claimed on your tax forms.
You’ll get dinged for giveaways, too
Remember when Oprah Winfrey gave away 276 Pontiac G-Six cars on the season premiere of her 2004-05 season? That hyperbolic stunt gave comedians a new Oprah punchline (“You get a car! And you get a car!”), but it gave her lucky beneficiaries, most of whom were picked to be audience members because Winfrey thought they “deserved” a car, a tax headache.
The Pontiac’s sticker price of $28,500 had to be claimed as income. If the person who got the car was in a high tax bracket, they faced a bill of as high as $7,000. So Oprah’s supposedly free car in fact cost audience members up to $7,000. (Hatch, too, was nailed by the IRS for failing to report the $27,000 Pontiac Aztec car he won as part of his “Survivor” haul, although in that case it was explicitly a prize.)
When the press caught on to the loophole, Oprah’s Harpo Productions told audience members that if they didn’t want to pay the tax, they could either sell it for whatever they could and pay the tax with the profits or just decline to accept the car.
A representative at the ABC daytime show The View confirms that audience members typically sign a paper acknowledging they will be responsible “for any federal, state or local income taxes due on the gift.” The law also requires that if the goodies are worth more than $600, each audience member is issued a Form 1099 — and to make sure they can’t get out of paying, the gift is reported to Uncle Sam. If it’s worth less than $600, they’re on the honor system.
The Internal Revenue Code’s Section 74 states that if you get something as a prize or an award, you have to consider it part of your gross income. You might be able to get out of it if you’re part of a charity or if you can prove you didn’t do anything to earn the award, but the IRS thinks that even asking for tickets to a broadcast is enough to qualify any giveaway as a prize, which in turns qualifies it as part of your gross income. To the IRS, it doesn’t matter if Ellen DeGeneres hid a laptop under your seat or if you won it answering questions: You owe.
(VIA WALLOTPOP DOT COM)