You Just Won a Car: Can You Afford to Keep It?
When you win a car, keep these important tax and cost implications in mind when deciding whether to take the vehicle or its equivalent cash value.
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Winning a car could sound like a thrilling moment, but the reality might not always live up to the initial excitement. Just ask one of the 276 folks who won a Pontiac G6 on Oprah's TV show back in 2004: Each reportedly faced up to $7,000 in tax burdens.
Whether they're given away by retailers, casinos, or even influencers on social media, cars are still popular prizes today. No matter where or how you win a vehicle, however, they almost always come with hidden taxes and fees.
Depending on the state in which you win the car and the make and model of the vehicle, your additional tax burden could be thousands of dollars — not to mention the additional costs of owning a new vehicle. In many cases, it may be more cost effective to defer and take the cash value instead.
If You Win a Car, Do You Pay Taxes?
Just like if you won the lottery, there is a prize tax imposed when you win a car. Any earnings of $600 or more require the winner to fill out unique tax forms, typically a 1099-MISC. This almost guarantees that the car you win will be subjected to payments to the IRS.
Cars won as prizes are subject to taxes calculated on their fair market value. This value refers to what an interested buyer would likely pay for the car, which may be determined based on a metric such as the manufacturer's suggested retail price or Kelley Blue Book value.
The value of the vehicle won will be considered part of your income for the year, so you'll be taxed based on the bracket where your current earnings, plus the value of the car, place you. According to Kelley Blue Book, the average transaction price of a new car is $48,759, and according to the United States Census Bureau, the per-capita income is $41,261. So winning a new car could increase a recipient's total yearly earnings to $90,020. Consequently, this could raise the total federal taxes owed for the year from $3,069 to $12,065 — a tax increase of $8,996.
In addition to federal income tax, winners will also have to consider their individual state income tax burden, which will vary.
What Happens if You Win a Luxury Car Such as a Ferrari?
No two car giveaways are exactly the same, and while winning a high-end vehicle could be exciting, a more expensive car could pose an even greater tax burden.
Say you win the 2024 Ferrari Roma, the cheapest of their lineup, at $247,308. Considering the per-capita income of $41,261 and federal taxes of $3,069, winning the Ferrari Roma would push this individual's earnings to $288,569 — raising their tax burden to $68,046, an increase of $64,977.
New Car Registration Fees and Insurance
In addition to your tax burden, consider the financial responsibility of car ownership. With your new car, you'll likely have to create a budget for your registration, insurance, maintenance, and fuel, which can add up to thousands in yearly expenses.
Owners will need to pay a car registration fee that will vary by state. While small compared to the other costs associated with your new car, it's still worth considering. In 2024, average yearly premiums for full-coverage insurance are $1,982, and fuel represents another expense.
If the car you won is electric, the costs could pile even higher. In Texas, for example, new electric vehicle owners pay an initial $400 registration fee, and installing a home charger can exceed $1,000.
For the More Cost-Friendly Option, Consider Taking the Cash Prize
If you win a car, you should consider whether the "free" vehicle is actually worth the tax burden and mounting ownership costs. In some cases, you may be able to claim the cash equivalent as opposed to the actual vehicle. While you'll still bear the same tax burden as if you won the physical car, you'll be able to pay the taxes using the prize money.
If the cash-out option isn't available, it might be wise to take out a loan to help cover the tax burden. While you'll still bear the cost, a loan can break down the payments into more manageable installments and ease the immediate financial impact.
