Why Is the ARV for My Prize So High?
Is Your Prize Overpriced? Here's Why and What to Do About It
Winning a big sweepstakes prize is very exciting... until you have to pay your sweepstakes taxes and you find you need to add the value of the prize to your taxable income.
If your prize is worth a lot of money, it can add a significant amount to the taxes you pay to the IRS (remember, only sweepstakes scams ask you to pay money to the companies hosting the giveaways). But before you avoid a giveaway because you feel the ARV is too high, keep in mind that there are some things that you can do to ensure you're paying a fair amount of taxes.
Why Are ARVs So High?
When sponsors set up sweepstakes, they determine the ARV of the prizes to be awarded. But remember that ARV stands for "Approximate Retail Value," and that the name has "approximate" in it for a good reason: the sponsors are really just guessing how much the prize will be worth when the winner receives it.
Take, for example, a vacation sweepstakes that is giving away a trip to Las Vegas including airfare, hotel, and event tickets that must be taken by the winner within a year of the award date. In this simple vacation prize, you have three variables to estimate for the ARV:
- The cost of the airfare
- Nightly costs for the hotel
- Ticket prices
However, there is a significant amount of variation in the value of even these three elements.
The price for the event tickets is probably not going to vary too much, but hotel prices can fluctuate quite a lot depending on the time of year the winner decides to travel.
And airfare rates are even more volatile. Air ticket prices are seasonal, and can leap in price overnight. Plus, it's impossible to know in advance where the winner will live. Airfare to Las Vegas from, say, Los Angeles is going to have a much different cost than airfare from Hawaii, Maine, or Virginia.
And if the winner lives in a remote area, the number of airlines the winner can use is limited, making the prices likely to be higher.
Or consider a promotion where the sponsors are giving away a free computer. When the sponsors set up the giveaway, the computer is worth $2,000. But by the time the prize is actually awarded six months later, its value has depreciated, and that same computer might only be worth $1,200. Prizes like cars could depreciate in value even more dramatically.
It's difficult to predict what a prize will actually be worth, especially for longer-running sweepstakes that could last months or longer.
Sponsors may have other reasons for over-estimating an approximate retail value as well. Entrants tend to get more excited about big sweepstakes, which means that estimating a high value for a prize could make the sweepstakes much more successful for the company hosting it. Plus, the ARV could affect the sponsor's taxes as well.
Does a High ARV Really Matter?
The good news is that the ARV of a sweepstakes prize is (more or less) irrelevant. United States residents only pay taxes on the fair market value of the prize at the time you receive it. If you feel like your prize value has been exaggerated, you can always dispute the ARV on your taxes.
Sweepstakes taxes are a good reason to be picky when you're entering sweepstakes. If you don't feel like the prize is worth the taxes you'll be paying on its true value, it's a good idea to skip that giveaway. However, if you would be willing to pay the taxes on a reasonable estimation of the prize value but feel the ARV is too high, don't let that dissuade you. If you really do win, proving the prize's true value will make the taxes affordable.