When you receive a gift, you never have to pay the gift tax. It's paid by the donor. Unfortunately, if you won an automobile from a company or organization, it isn't a gift that is covered by the gift tax. Instead, it's treated as a form of noncash compensation, and you'll have to pay income tax on it.
Winning a Car
When you win a car in a contest, raffle or other such event, it gets reported to you and to the Internal Revenue Service on a 1099 informational report form. The entity that gives you the car will enter the car's fair market value on the form, and you will have to pay income tax on it.
Keep or Sell
If you choose to keep the car, the taxes can be significant -- winning a $25,000 car when you pay taxes in the 25 percent bracket will cost you $6,250 in federal taxes. One option is to sell the car, use the money to pay the taxes, and keep the difference. If you do this, though, it may establish a different value for the car. Should you sell it for less than the fair market value identified by the giver, you could save money, but if you sell it for more, you'll have to pay taxes on the higher value that you established.
If you win a car that comes with prepaid taxes, you could still end up owing money. The taxes that get prepaid for you are also income. As such, if you win a $25,000 car, and the company pays $5,000 in taxes at a 20 percent rate, you've really received $30,000 worth of income. You will still have to pay the taxes on the money used to pay your taxes. The IRS also holds you responsible for any difference between the taxes that were withheld and your actual rate if they're not the same.
Why Not a Gift
It would be a lot easier if the car you won was treated as gift. However, the gift tax can only be paid by individuals. Technically, if a partnership or corporation gives you a gift, every shareholder in that corporation is responsible for that gift and would have to be liable for her share of the gift.
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