If you’re lucky enough to win a car in a sweepstakes or contest, congratulations! You’re likely thrilled to avoid dishing out a great deal of money for a brand new sedan, SUV or truck.
But there may be unexpected tax implications that comes with winning a car. While the tax amount will depend on the specific details of your car, you can expect to pay about ⅓ of its value. If the new car is worth $20,000, you’ll owe about $6,500 in taxes.
It’s essential to consider if a new car is worth the additional tax expenses. If you’re worried about how to afford this gift, here are some tips to help you out.
Consult a tax professional
First reach out to a tax professional. They can help define tax liabilities and help you figure out if it makes sense to keep the car. Here’s how to find a tax professional.
You’ll owe taxes on the car the tax season after you win the car, not right when you win it.
If you win the car in October 2019 and receive it in January 2020, you won’t pay taxes on it until you submit your taxes in April 2020. This will give you plenty of time to design a plan and save for your taxes if you do decide to keep the car.
The tax professional may give you advice on how to maximize your tax deductions this year to lower your overall tax burden. This includes contributing to your 401(k) or other retirement account or making a charitable donation.
Saving up for that tax bill
Now that you have a brand new car at your disposal, sell your old one to a dealership or private party. (We have a guide here.) You can lower your overall tax burden and maybe even make a profit.
Get a plan in place to set a specific amount of money aside each month for the upcoming tax bill. With this strategy, you should be in good shape once tax season comes around.
Using a budget is a great way to stay on track – here’s a downloadable spreadsheet.
When you should take cash instead
If you don’t feel confident that you’re going to be able to pay the taxes on the car or you simply don’t want to deal with the hassle, ask if you can get the value of the car in cash instead. You can always use this money to buy a more affordable car.
Be sure to research the exact market value of your car if you choose to go this route, so you don’t get stuck with a cash amount that’s less.
While winning anything is exciting, it’s important to know the financial obligations that come with it. Here’s how to responsibly handle your winnings.
Image: Michael Mroczek