I Won a $45,000 Car in a Raffle and Now Owe $14,000 in Taxes. 'Does This Sound Right?'

Being selected for a raffle is exciting, whether you’re getting a gift card, concert tickets, vacation or another prize. But once you’ve snagged your winnings, the last thing you probably want to think about are the taxes you’ll owe.

It’s important, though, that you do. Otherwise, you may end up with a surprise tax bill. That’s the case for a user who recently posted in the subreddit r/tax that, along with their wife, they won a $45,000 car in a raffle and now owe $14,000 in taxes. "Does this sound right?" the user wrote. "I'm grateful for winning the car but now the 45k car has turned into me writing a check for 14k" — a $14,000 check they didn't expect to have to write.

Expert advice: Assess the fair market value

To answer the user’s question, this does sound right; prize winnings are taxed at ordinary income.

"Generally, the U.S. federal government taxes prizes, awards, sweepstakes, raffle and lottery winnings, and other similar types of income as ordinary income, no matter the amount," according to H&R Block’s website. "Your state will tax the winnings too, unless you live in a state that does not impose a state-level income tax."

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Your income will determine your tax rate. Here's an example from H&R Block: "If you make $42,000 annually and file as single, your federal tax rate is 22%. If you win $1,000, your total income is $43,000, and your tax rate is still 22%." But it's possible your winnings could push you into a higher income tax rate, which is something you should be aware of before you file your taxes.

TaxAct has a lottery tax calculator you can use to estimate how much you’ll owe in taxes. You just have to enter your prize amount and state.

With cash prizes, the process is more straightforward. But with a prize like a car, the amount of taxable income is determined by the fair market value (FMV).

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"The prize payer, such as the contest sponsor, is responsible for determining and reporting the FMV to the winner and the IRS," according to the team at LegalClarity.org. But there’s a catch: "If the winner believes the stated FMV is inaccurate, they must prove a lower valuation using qualified appraisals or comparable sales data."

The couple may be able to lower the amount of taxes they’ll owe if the FMV is actually lower than the prize payer said. You can get an estimate online via sites such as Kelley Blue Book and Edmunds.

They could also sell the car. Though that won’t change the FMV, it could free up money to cover the taxes and pocket some cash.

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