Do You Have to Pay Taxes After Winning a Car?

Winning a car may seem like a dream come true, but it often comes with a tax bill. The IRS considers prizes taxable income, meaning you could owe money before even driving off in your new vehicle. Depending on the car’s value and your location, these taxes can add up quickly.

The 1099 Form From Prize Sponsors

When you win a car, the prize sponsor must report its value to the IRS using Form 1099-MISC if the prize is worth $600 or more. The amount listed represents the fair market value assigned by the sponsor, which the IRS treats as taxable income.

Sponsors typically report the car’s Manufacturer’s Suggested Retail Price (MSRP) or what they paid for it. However, MSRP doesn’t always reflect real-world pricing, as dealership incentives and regional differences can lower the actual sale price. If the reported value seems inflated, you can dispute it with the IRS by providing evidence such as comparable sales listings or written appraisals.

Receiving a 1099-MISC means the IRS is aware of your winnings, and failing to report it can result in penalties or an audit. The form is usually sent by January 31 of the year following your win, and the reported amount is added to your taxable income, potentially affecting tax credits or deductions.

Determining the Car’s Fair Market Value

The fair market value of a prize car isn’t always the same as its sticker price. While sponsors often report the MSRP, this figure doesn’t necessarily reflect what the car would sell for in a real-world transaction. Dealership discounts, depreciation, and regional demand all influence actual market value.

To determine a more accurate value, check sources like Kelley Blue Book (KBB), Edmunds, or the National Automobile Dealers Association (NADA) guides. These platforms consider mileage, optional features, and local demand. If the reported value on your tax form is significantly higher than what similar cars are selling for, you may have grounds to challenge it with the IRS.

Auction results and recent dealership sales can also serve as evidence. If the same make and model consistently sell for less than the reported amount, gathering this data can help you argue for a reduced taxable amount. The IRS allows taxpayers to dispute valuations, but proper documentation—such as written appraisals or comparable sales listings—is required.

Federal Income Tax Obligations

Winning a car increases your taxable income, which may push you into a higher tax bracket. The tax rate applied to the prize depends on where your total income falls within the 2024 tax brackets, which range from 10% to 37%.

Since taxes on prizes aren’t automatically withheld, you must cover the amount owed when filing your return. For high-value prizes, this can result in a significant tax liability. For example, if you earn $60,000 annually and win a car valued at $40,000, your taxable income becomes $100,000. Based on 2024 tax brackets, part of this amount would be taxed at 22%, while the portion exceeding $95,375 would fall into the 24% bracket. This means you could owe around $9,000–$10,000 in federal taxes just for accepting the prize.

If you can’t pay the full amount by the tax deadline, the IRS offers installment agreements, but interest and penalties apply. Failure-to-pay penalties accrue at 0.5% of the unpaid balance per month, up to 25%, and interest compounds daily based on the federal short-term rate plus 3%. Some winners sell the car to cover their tax obligation, but depreciation and market conditions may affect how much they can recover.

Handling State and Local Taxes

State and local governments also impose taxes on prize winnings, which can significantly increase the cost of accepting a car. Most states treat non-cash prizes as taxable income, meaning the car’s fair market value is subject to state income tax.

State tax rates vary widely. California, for example, has a progressive tax system with rates ranging from 1% to 13.3%, while states like Texas and Florida do not impose an individual income tax. This means a winner in a high-tax state could owe thousands more than someone in a state with no income tax.

Some states require estimated tax payments if the additional income from the prize substantially increases total earnings. Failing to pay these estimated taxes on time can result in penalties, often around 5% to 10% of the unpaid amount.

In addition to income tax, winners must also pay sales tax when registering the vehicle. Unlike income tax, which is based on earnings, sales tax is a percentage of the car’s value and must typically be paid upfront before the vehicle can be legally driven. Rates vary by state and sometimes by county or city, with some areas charging upwards of 10%.

Impact on Your Overall Tax Bracket

Winning a car can affect more than just your immediate tax bill. Since the IRS treats the prize as additional income, it can push you into a higher tax bracket, increasing the percentage of your earnings subject to taxation.

This change can also impact eligibility for tax credits and deductions. For example, tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) have income limits, and adding the car’s value to your taxable income could disqualify you from receiving them.

Deductions that phase out at higher income levels, such as student loan interest deductions or IRA contribution deductions, may also be reduced or eliminated. If your adjusted gross income (AGI) increases significantly, it could affect financial aid eligibility for college students, as FAFSA calculations consider household income when determining aid amounts.

Possible Paths if You Cannot Afford the Taxes

If you can’t afford the taxes on a prize car, there are several options to consider. Some winners decline the prize altogether to avoid any tax liability. While this may seem counterintuitive, it can be a practical choice if the financial burden outweighs the benefit of keeping the vehicle.

Selling the car is another common solution, though depreciation and market conditions may affect how much you can recover. If selling isn’t an immediate option, the IRS offers installment plans that allow taxpayers to spread payments over time. Short-term payment plans (under 180 days) do not incur setup fees, but long-term plans require a fee ranging from $31 to $225, depending on the payment method. Interest and penalties continue to accrue, making it important to pay off the balance as quickly as possible.

Some winners explore personal loans or home equity lines of credit to cover the tax bill, though these come with their own risks, including interest costs and potential impact on credit scores.