I admit – I have a mild obsession with some reality TV shows (especially Amazing Race). Being an accountant, naturally I have always wondered how the winnings are handled and what the winners do with their money.
Essentially all modern reality TV shows have some sort of prize at stake – cars, a house or just cold card cash. While viewers see the winner crowned, what they don’t see is how the winnings are handled after the show ends.
Taxes on Winnings
In the United States (where most reality shows are filmed) tax laws require that winnings from TV shows are treated as taxable income – and therefore subject to tax. The highest marginal tax rate in the United States is nearly 40% (federal) and 9% (state) – so depending on the state the winner resides in, they may have to give up nearly half of their winnings in taxes.
If they won a smaller prize, like a vehicle, and sold it for cash – they would still need to pay taxes. The value of the new vehicle is included in their taxable income for the year once they have won it and would need to be reported. The winner can sell it for cash but they would still need to report the income that year.
Why Winnings Aren’t ‘Free’
Any material item won on a TV show isn’t really ‘free’ because of the tax system. The value of the item is taxable as soon as it is won, so the ‘net’ value you receive from an item isn’t equal to what it’s actually worth.
If you win a $20,000 vehicle and your marginal tax rate was 40%, you would pay $8,000 in taxes. If you can’t afford to pay the taxes, then you can sell the car – but you still need to pay the taxes.
Some experts suggest any winnings are simply items given at a ‘discount’ rather than ‘free’ simply because they are taxed in the hands of the winner.
Prizes vs. Gifts
United States tax laws state that any item given as a ‘prize’ is taxable in the hands of the recipient. It can also be deducted from the income of the person giving the prize. On the other hand, if it was marked as a ‘gift’ – it wouldn’t be taxable and the gift giver wouldn’t be able to deduct it.
Canadian TV Show Winnings
Fortunately, Canadian tax laws state that any winnings (lottery, TV shows, etc) are not taxable. So when a contestant wins $1 million – they actually net $1 million in cold hard cash with no taxes payable. Sweet deal for Canadians!
Some popular American TV shows have taken flack because they give out prizes or gifts, but the winners end up having a headache when tax season comes around. Here are some recent controversies:
- Richard Hatch, winner of the 1st season of Survivor, was convicted of tax fraud for failing to pay taxes on his $1 million prize. He claimed he wasn’t aware he owed any taxes and appealed but served 9 months in prison
- Oprah gave her studio audience (a total of 276) all vehicles on one of her shows but was given flack when many of the audience members ran into tax problems when they couldn’t afford to pay the taxes on the vehicles. They felt the prize should have included a lump sum to cover the taxes associated with each vehicle
- Extreme Makeover: Home Edition is a show that documents an older unlivable home being completely renovated for a needy family. The show faced flack in 2004 when the recipients of the new dream home had a significant increase in the assessed value of their home and weren’t able to afford the increase in taxes due to the new tax-assessed value
Conclusion: In Canada, luckily all winnings are not taxable regardless of their size. In the United States, TV show winnings are subject to taxation and the prizes won on some shows shouldn’t be viewed as free – they are more of a discount because of the taxes. Federal and state taxes can add up to almost 50% for large prizes.
What do you think? Is it fair that winnings are subject to taxes?