Won a Free Vacation? Don't Be Surprised by These Taxes
Free Vacation Prizes Can Be Amazing, But They Have a Price
When You Enter to Win a Trip, Don't Forget the Taxes
A free vacation sounds like a dream come true, right? And in most cases, they are. Vacation sweepstakes give you the chance to have unique experiences not open to the general public, go on custom-tailored trips, or win travel vouchers or cash to put together a trip you've been dying to take. However, you should be aware that while the trip itself may be covered, there are still costs to winning.
Get to know the taxes and fees you may be required to pay on your free trip before you decide whether to accept it or decline the prize.
Vacations and All Sweepstakes Prizes Must Be Declared on U.S. Taxes
Whether you win vacation prizes, cash, or any other type of sweepstakes prize, US residents are responsible for declaring the value of their prizes on their taxes. For more details, see How to Pay Your Sweepstakes Taxes.
You'll be taxed on the value of your sweepstakes prize as if you had earned it as income, just as you declare the income you receive from your job, and you'll be taxed at the same rate for both. Therefore, it's important to be sure that you're stating the correct fair market value of the prize when you do your taxes.
Vacation prizes often have some differences between the estimated prize value and the actual value of the trip. This might work in your favor, enabling you to reduce the amount of taxes you owe on your trip.
If you think that the ARV of your prize is higher than the fair market value, see How to Dispute the ARV of Your Prize for more information.
Taxes Specific to Vacation Prizes
On top of the taxes due on all sweepstakes prizes in the United States, you may be responsible for additional taxes on vacation prizes.
Some sweepstakes don't cover the taxes that the government levies on the individual portions of your prize. These additional vacation sweepstakes taxes may include:
- Port taxes on cruises.
- Room taxes for hotel stays.
- Airport taxes, like the 9/11 security tax, fuel taxes, etc. for flights.
And don't forget that vacation prizes come with costs other than taxes as well.
How Will I Know Which Taxes are Covered in My Vacation Prize?
Usually, the rules of the sweepstakes you enter will indicate any taxes that aren't covered by the sponsors. As these vacation prize taxes can add up, be sure to read the rules carefully before entering to win trips. If the rules aren't clear, you can discuss the details with the sponsor before you decide whether to accept or decline a prize.
Caution about Additional Taxes on Vacation Prizes
One of the warning signs of sweepstakes scams is that you pay taxes directly to the IRS, not to the sweepstakes sponsor. So if someone asks you to wire them thousands of dollars to pay your taxes before receiving your prize, it's a good sign that you're being scammed.
But the additional taxes for vacation prizes, like port taxes or airport taxes, are not paid to the IRS. These are, in fact, often paid to the sweepstakes' sponsor if they aren't part of the prize.
These types of taxes are the rare exception to the rule. (Note that income taxes on vacation prizes are still paid to the IRS).
If a sponsor asks you to pay port taxes or other vacation prize taxes, be sure to double-check the other warning signs of scams to make sure everything else looks fine. Refer to the sweepstakes' rules to see whether these taxes were explained in advance. And check that the amount you are being asked to pay is reasonable. This will help keep you safe from scams.
Does This Mean You Shouldn't Enter to Win Free Trips?
Despite the costs, winning a trip means that you can have an unforgettable experience at a fraction of what you would pay if you planned the trip yourself. Some trips include experiences that you simply can't buy, others include cash to cover some or all of the expenses.
And even the ones that don't may well be worth the price.
It's wise to take a realistic look at what you would need to pay for your free trip, and then decide whether the costs will be worth it. In many cases, the answer will be an enthusiastic yes, but in others, you can spend your time better on other giveaways.
Disclaimer: Tax laws vary from country to country; this article regards taxes in the United States. This is not intended to be legal advice. For tax advice that matches your specific situation, consult a tax professional.