How to handle taxes when you win a car

Whether you hit the jackpot in a sweepstakes, nailed that radio contest, or scored big on a game show, driving away with a shiny new set of wheels isn't free. Yep, even when you win something, the taxman still wants a cut. Don’t worry—Peddle is here to break down the cost of winning the big enchilada.

Why do we pay taxes on a prize?

The answer boils down to one key thing—the IRS considers prizes as income. Whether you win cash, a vacation, or a brand-new car, the value of your prize is treated as taxable income. The same rules apply if you win any other big-ticket item. That means you're responsible for paying federal taxes and, in most cases, state taxes.

How are the taxes calculated?

Here's the kicker—taxes you owe are based on the value the company giving away the car says it’s worth when you win it. Sometimes, this amount could be higher or lower than the sticker price at a dealership. The company will report this value to the IRS and provide you with a tax form showing the amount.

The exact tax amount will depend on your tax bracket, but here’s a ballpark estimate: if you're in the 24% federal tax bracket, you could owe around $7,200 in federal taxes on a car valued at $30K. Ouch, right?

What about state taxes?

The rate varies depending on which state you live in. For instance, California has one of the highest state income tax rates, around 13.3%, while other states, like Texas or Florida, don’t have any. You’ll also need to budget for sales tax when you head to the DMV to register your car. Depending on where you live, it can range from 3% to 10%. Fun, right?

How do I pay these taxes?

So, you’ve won a hot rod and are now staring down a pretty hefty tax bill. You have two options: pay out of pocket or sell the car. When you file your return, you can dig into your savings and pay thousands of dollars in taxes. But the popular choice is selling the car to cover the taxes while leaving you with some cash in hand.

Can I write off any of the taxes?

Unfortunately, there aren’t tax deductions for winning a car. If you decide to donate it, you can write it off if the organization is a qualifying charity. It’s not a direct tax reduction, but it can lower your taxable income.

What happens if I can’t pay the taxes?

The IRS offers payment plans, which can help spread the cost over a longer period. It’s also a good idea to reach out to a tax professional to explore your options and make sure your bases are covered.

Winning a car sounds fun, but the reality of taxes can make it a bummer. If selling sounds like the best bet, Peddle can get you out of the pickle. Get an instant offer, enjoy free towing, and receive quick payment. You’ve already won once, so keep the winning streak going.