The Financial Cost of Winning Big — And How to Play Smart

Winning an expensive prize or a large stack of cash can make your day, but don’t start celebrating just yet. You just might find that your winnings cost oodles in taxes. Here’s where winning big could cost you.

Sweepstakes Winnings: Pricey in The End

In the United States, sweepstakes wins are taxed just like any other kind of income. Whether you make $30,000 working at your day job or you win a $30,000 vacation doesn’t matter to the IRS – it’s all income. This is fine if you happen to win cash sweepstakes and can simply deduct the taxes from your winnings; but with vacations and other prizes, you have to find the money to pay the taxes elsewhere. Also, if you win a vacation, check what’s included in your winnings; will you be going somewhere where you can’t afford to eat, or is food paid for? If you can’t afford to pay the taxes or other expenses you might encounter by taking the prize, you’d be better off selling your winnings and keeping the cash minus the taxes.

Cars and Homes: You Can’t Afford to Keep Them

Winning your dream car or a spacious home will make you feel like you struck gold — until it comes time to insure that car or pay property taxes on that house.

The HGTV Dream Home Sweepstakes sounds like a dream come true, but it’s a giant tax nightmare for winners. Not only are winners hit with a heavy tax burden as if they’d made an extra few million dollars of salary that year, but winners will also be paying sizable property taxes every year. Just paying the utilities for such a large house can cost thousands every month. HGTV provides a large stack of cash to the winners — likely to help with the cost of winning such a large prize — but that’s taxable income too. No wonder most winners end up selling the home.

Gambling: You Can’t Net Your Wins and Losses

You can’t deduct gambling losses unless you are a professional gambler, so don’t try netting your winnings and losses to pay less tax. Keep a diary of your winnings and losses from lotteries, raffles, horse and dog races, casino games, poker games and sports betting. Then, itemize your losses as Schedule A deduction, reporting everything (no hiding money in Switzerland–that game is over).

If you gamble regularly (full time, even) to generate a great deal of your income, the Supreme Court has ruled that you can declare yourself a professional gambler, so you could probably get away with netting your wins and losses in this case. The amount of gambling losses you can deduct can never exceed the winnings you report as income. To lessen your tax loss when gambling, play in states with no income tax. Pennsylvania even exempts lottery winnings from its tax. Usually you can save money by taking your winnings over a few years rather than in a lump sum up front, but decide whether you’re as comfortable gambling on next year’s tax rates as you are betting on a horse race.

Next time you win big, just remember that most non-cash winnings will cost you in taxes. If you can’t afford it, sell it–or rent that house out for a couple years to avoid capital gains taxes.