Taxes on Vacation Prizes: How Much That "Free" Trip Will Cost You
That Free Trip You Won Might Not Be as Free as You Expect
Winning a free vacation sounds like a dream come true. Vacation sweepstakes give you the chance to win free trips to luxurious destinations, have unique experiences, or gather cash and vouchers to put together the trip of your dreams. However, before you start entering every vacation giveaway in sight, you should be aware that while the trip may be free, there are still costs to winning. Most "free" vacations come with taxes and fees you need to pay.
All Sweepstakes Prizes Must Be Declared on US Taxes
The first cost that you will need to budget when you win a trip is income tax. United States residents are required to declare the value of their sweepstakes prizes on their taxes just like regular income. See How to Pay Your Sweepstakes Taxes for more details.
You may be able to save some money on the taxes you owe by looking into how much the trip actually costs you and disputing the ARV on your taxes if there is a difference. Vacation prizes often have a higher estimated retail value than they really cost.
If you live in a region other than the United States, check with a local tax professional to determine what your liability will be if you win vacation prizes.
Vacation Prizes Come with Additional Tax Costs
On top of the taxes due on sweepstakes prizes in the United States, there are also some taxes specific to vacation prizes. These include:
- Port taxes on cruises.
- Room taxes for hotel stays.
- Airport taxes, like the 9/11 security tax, fuel taxes, etc. for flights.
Some sweepstakes sponsors will pay these costs while others will pass them on to the winners.
How to Know Which Taxes are Covered in Your Vacation Prize
Usually, the rules of the sweepstakes you enter will tell you which taxes aren't covered by the sponsors. 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 Vacation Prizes and Scams
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. If they are not covered by the prize, they are often collected by the sweepstakes' sponsor, making these types of taxes 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 list of warning signs of scams to make sure everything else seems to be on the up-and-up. 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.
Free Trips Cost More than Just Taxes
When you are deciding whether you should enter to win a trip or not, keep in mind that vacation prizes come with costs other than taxes as well. Time off of work, house sitters, new luggage or clothing to wear while you are on the road, and meals and other expenses can all add up.
Does This Mean You Shouldn't Enter to Win Free Trips?
While it might be disappointing that even free trips carry costs, that doesn't mean that you shouldn't try to win. Even considering taxes and travel expenses, vacation prizes end up costing a fraction of what you would pay if you bought the trip yourself. Plus, many include unique experiences that you can't buy or cash to defray the costs.
It's wise to take a realistic look at what you would need to pay for your free trip, and then decide whether the cost will be worth it or whether you should decline the prize. 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.