When you play the lottery or enter into a game show, mostly you think about the end prize - the cash or gifts you'll come home with.
When you win a prize on TV (like an Oprah! giveaway) or win the Powerball or another lottery, the federal and state government considers it taxable income. You'll be taxed on that amount. How much depends on the total income and the state where you live. As a general matter, you can expect to lose almost half of your award to taxes.
That means that after taxes the winners of Survivor or other competitive reality show walk away with less than $30,000 a year for 20 years. Big Brother awards around $500,000 in prizes. Because the tax bracket is lower, you pay slightly less, but still walk away with only about $375,000.
Are Players Aware of This?
Yes. The tax obligations are in the contract they must sign before appearing on a game show. Lottery players typically learn of tax liabilities from lottery web sites or their game tickets.
Also, the Internal Revenue Code states that whether you win something as a prize or an award, you have to consider it part of your gross income. The IRS doesn't care whether you get surprised with an iPhone under your seat or if you won it answering trivia questions.
Richard Hatch, the first Survivor winner was found guilty of tax evasion and was sentenced to jail.
Game show contestants and most lottery players can choose to receive their prizes paid out over many years, or they could choose to receive the present cash value of that annuity. An annuity pays over time and typically isn't worth as much if you cash out right away, so your taxes aren't as much.
For example, let's say you just won a million dollars. If you select the annuity option, you can expect about $25,000 for 40 years. If you want your money in a lump sum, you can only expect about $450,000, or about $375,000 after taxes. This ends up being about one-third of the promised million dollars. In fact, it's close to what you'd get if you won a $500,000 prize as a one-time payment.
What About Non-Cash Prizes?
You must also pay taxes on non-cash winnings such as cars or vacations, using the "retail value" of the prizes. Contestants are typically told that all awards are considered taxable income and must be reported to the IRS. Let's say you just won a $10,000 vacation on Wheel of Fortune. You'll pay taxes on that as if you just got a check for $10,000.
Not only are you paying higher taxes, but keep in mind that in these shows the prize's value is usually the highest rate available. If you bought the same vacation through a travel agent, most likely you could get a much better package. Same thing with cars. They're usually listed with their sticker price and not their market value.
What about State Taxes?
Not only do you have to pay taxes to the federal government, but you also need to pay state income taxes. Keep in mind that most game shows are filmed in California, therefore California's high tax will be deducted from your prize.
As a general rule, if you live in one state and win a game in another, you're first taxed by the state where the game was played or where you bought the lottery ticket. Then, if your home state has the same or a lower tax rate than the other state, you won't have to pay taxes in your state. If your state's tax rate is higher, you'll get a "credit" for the taxes you paid to the other state and pay the difference to your state.
What about Giveaways?
For those people who don't enter game shows but simply attend their favorite talk show, let's say Oprah! or Ellen, and lucky for them, the hostesses feel generous and indulge the crowd with various gifts, you need to pay taxes for these as well. In her 2005 season premier Oprah Winfrey gave all her 276 audience members brand new cars. The car's sticker price of $28,500 had to be claimed as income. Some people had to pay up to $7,000 in taxes.
Oprah's company told the audience members that if they didn't want to pay taxes for the car, they could either sell it for whatever they could and pay the tax with the profits or refuse the gift.