Why You Don't Want to Win a Car as a Prize: Understanding the Scam

Originally published: 05/2006 by J Wynia

One of the local radio stations started hyping the fact that they're giving away a Hummer H3 in a few weeks. Every time I see this, I get the urge to tell everyone I can about how bad of an idea it is to enter these contests.

I know what you're thinking. "Why on earth wouldn't I want to win a $30,000 car? After all, even if it's not the car that I want, I can sell it and get my dream car."

See, that's the problem. If you dig out your magnifying glass and read through the terms and conditions and sit down with your accountant, you'll find that winning one of these isn't so simple. In almost every case, the following things are true.

  1. You get to pay the government taxes on the full price of the car. In this case, about $10,000. Oh crap. I guess I do have to sell it to pay the taxes.
  2. Not so fast. Many of these contests actually make you agree not to sell the car for at least a year. In large part this is to avoid the PR problem of talking about how happy you were to win the car only to have the local news follow up and report that you actually aren't that happy and you sold it.
  3. You now get to insure a $30,000 car. And, since many of the cars given away in these contests are highly desirable, they're high on the theft risk charts at your insurance company and you get to pay through the nose for the priviledge of driving your new boat anchor.
  4. By the time you can sell it, it's now depreciated at least $5000 or more.

Unlike contests where actual cash is given away, you can't just take part of the prize to pay everyone who needs a cut. Win the lottery and you just deposit the whole works and write Uncle Sam and Uncle Minnesota for their cut and move on with the rest. Win a big, expensive object instead and you get to bear the extra burdens yourself for at least an entire tax year before you can get at the value.

You gotta love how companies will do something that looks generous and you get screwed over. A lot like many of those TV shows that do major house renovations and the homeowner (selected because they were in dire straits) gets to pay for the increase in property taxes, etc. Or people who buy cellphones or satellite dishes as gifts and leave the recipient with a monthly bill. Thanks but no thanks.

Comments

Lars on 5/28/2006
Hey. I stumple upon your site every now and then and enjoy reading some of your posts. I just read the Apple HTPC blog and found it interesting. Anyway, why I'm writing is because I found it frustrating to navigate to your startpage, why not add a link or link your illustration at the top? Just a thought! Cheers!
Ari on 10/3/2007
While your argument is valid, calling it a 'scam' is inflammatory and inaccurate. The organizations and companies that offer these prizes don't benefit from you getting screwed on taxes. They aren't in cahoots with the government, rubbing their hands together gleefully as they wait for their victim. Bottom line, in the US when you get a windfall, the government has the right to take what they think is their cut. Doesn't seem fair? Well, a lot of people think income tax is the scam.
J Wynia on 6/5/2007
When you win a car, it's not the sales tax we're talking about. In the United States, that prize car is treated as *income* and goes on your income taxes. So, the taxes are more like the $13,000 we're talking about. That's the whole point. If you make $40,000 a year and win a $42,000 car, you actually owe more money to the IRS on the car that year than on your salary. However, you frequently can't sell the car to get the money to pay the taxes.
Jon on 5/29/2007
Aside from actually being smart enough to read the rules and understand the contest (not very easy with a radio or tv contest) it would pay to find a car contest that at least offer a near-value cash alternative. This way, your worst case still puts you ahead after taxes and you can apply the cash to a car you actually WANT :) Imagine the shocker of winning a high dollar exotic car and having to sell or refinance your house to cover the taxes because you couldn't sell the car under the agreement! Yikes.
Dave Jorgensen on 4/16/2007
You make a compelling argument; however, I think each person must examine their own circumstance. I am in the market to buy a new car in the $25K to $35K range. I can afford to pay the income tax if I won a car, and I would indeed gladly settle for the make and model won. Quite honestly, for the $15K to $25K savings (accounting for the income tax), I would be very happy to drive a $30K car that I didn’t pick out. As for the difference in insurance cost, property tax cost, etcetera, I don’t think it would be material compared to the costs of the car I would have chosen to purchase myself. In my personal circumstance, I wouldn’t look that gift-horse in the mouth. Best regards, and keep up the good work.
J Wynia on 4/16/2007
Sure, there are always exceptions to these rules of thumb. However, yours is pretty much an outlying case for cars as prizes. I'd be willing to be substantial amounts of money that 99% of people entering or interested in entering such contests wouldn't be in such a situation. I always assume that people who can recognize themselves as being able to break these kinds of rules usually will just do so and know what they're doing. However, SO many people end up *completely* screwed when they win the lottery or a car that I want to get the word out for exactly how this stuff works and make sure people know that they'll be on the hook for $10,000 if they win that H3 in the contest.
Kelly on 7/17/2007
I personally know two people who won vehicles and it was indeed a nightmare for exactly the reasons noted in the article. One person kept their casino win and paid the taxes. The other won a SUV in a fishing contest and sold it but really didn't see much profit.
Kedra Hopkins on 6/3/2007
I recently stumbled across a newspaper car contest, and noticed there are no rules and regulations posted. The vehicle was a Cadillac CTS, a 2007 model, a $42,000 car. I estimate the kid that won that will have no idea of the $13,000 tax he will have to pay on that vehicle, incluing TTL an possible dealer fees.
Auntie Beth on 1/6/2008
"Organizations and companies that offer these prizes don't benefit?" What are you talking about? They benefit from the publicity and interest in the product/service they were trying to attract attention to.
Mark on 2/17/2008
Calling it a scam shows your lack of math skills. Assuming one is even in the market to obtain a new car, it's lots cheaper to get a $30K car by paying one third its cost in taxes, than, to buy it full price (PLUS the cost of interest, if financed).
Jack on 6/4/2007
What are you people talking about. Sales tax on a $42,000 car at 7% tax is around $3000.
Sandra on 6/13/2007
Your post inspired me to write an article for the About Contests website about how to reduce the burden of taxes on car wins. Thanks for the idea! The blog post about the article (where I've linked to this post) can be found here: http://contests.about.com/b/a/000042.htm
An Actual Princess on 3/8/2008
Talk about the Apple iphone. Is there something better with most of its features?
J Wynia on 2/17/2008
Please read ALL of my posting, which included a dialog that I've heard dozens of times about car contests: namely the "I don't want a XYZ car, but I'll just sell it and get the one I want" belief. Given how many people seem to believe that that's possible and how often that's not true, there's a bait and switch going on. I don't believe it's malicious in it's intent, but it's still a bait and switch. And, while we're defining terms, Mark, your argument would have more credibility if it wasn't framed by an ad hominem attack. Have enough respect for your fellow humans to criticize their ideas, not them as people, their character or their skills. You point out a very specific set of circumstances (and qualify them by saying one should "assume" a set of criteria) wherein the math works out and you actually get a car that you want. My whole point is that those circumstances represent the exception rather than the rule. Basically, if you can see the math clearly enough to be pissed at me, you probably can work it out well enough for yourself. Other people, however, are completely in the dark about the way these contests work. Was the title inflammatory? Sure. If I wrote it today instead of 2 years ago, would I omit the word "scam" probably. However, I KNOW that this article has informed a lot of people in the last 2 years and I stand by it.
Mark on 3/1/2008
J Wynia, I'm not mad at you. I wasn't even addressing you. I responded to a reply above. It doesn't matter which, by now. My biggest mistake was that I focused on specific scenario of hypothetically winning a car that one actually planned to keep! (Imagine that!) I do apologize for my framing my reaction inappropriately, as I did. BTW, a huge scam about win-a-car contests I don't see addressed here is that, from what I've observed from recent searching on major internet search engines: many (if not most of) so-called contests are nothing more than fraudulent ruses designed to collect contact info for future targets of email advertising spams.
Ed on 6/15/2008
Well I actually won a pt cruiser. It was "pimped" out with a playstation, video player, and heavy duty stereo system. Also had blue neon lights under the car and through out the inside. Everything here is true. I paid taxes on the full MSRP plus the ad ons. Kept the car for a year and then re-sold it back to the dealer. Ended up clearing about $8K. All in all it was a fun experience, but it wasn't without hassels. I didn't need or want a car. It all happened by chance. I didn't even enter the contest. I was just an extra.
jen on 10/12/2008
http://contests.about.com/od/taxesfinances/tp/affordingcartax.htm How to pay taxes when you win a car.
Sandra on 4/7/2009
Whether it's money or a car, it's treated the same way. Nothing is garnished, but you will owe taxes on the value of the prize, just as if it's regular income. You'll report the prize value as income on your yearly taxes, and pay the taxes directly to the IRS.
Sweeper on 8/6/2009
One thing nobody has mentioned is the fact that most people cannot afford to buy a car. When they go out looking to buy, they get a loan. Cash versus a car. The ARV of cash CAN'T be jacked up. The ARV of cars, houses, et al USUALLY are, I've noticed on many sweeps. Why is that? I don't know. Perhaps whoever gives away the prizes is getting a tax break so it behooves them to raise the ARV as high as they possibly can. Vacations are the WORST when it comes to overvalued prizes. I do enter car contests and I go straight to the ARV in the rules. If it's sky-high for the type of car they're giving away, I don't enter. Here, I have to pay sales tax on the market value, not just pay in come tax on the prize so I know I have to have a lot of money stashed when I win. I don't go for cars over 25k, that would be throwing money (that I really don't have) away. Good luck sweepers!
Ray on 4/4/2009
What happens if they offer you a car or money? ie. CAR, $35,000 or Cash $25,000 Can we take the cash and avoid taxes? Or will 1/3 of the $25,000 be garnished
Evonka on 5/7/2009
Okay; you won a $30,000 car and you whine about it. Even IRS will work with you to payoff the amount you owe; as for the insurance well, if you have a good driving record your insurance will not be outrageous. I just bought a car not to long ago and researched various models including cars out of my league--all offers were between 75-185 a month. You can even install a security system and this will decrease your insurance. I am 34 years old, not wealthy, three children, going to school full-time and taking care of a parent. I feel very sorry for you; instead of counting your blessings you find fault and negativity. You have a car that entails amazing sell appeal or better yet will last more than 20 years.Scale down living for a year and take up a part time job.
Jenna on 8/12/2009
This organization is raffling off a car and they are covering the income tax for the winner. It seems not all organizations are scams.
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