Thursday, December 22, 2011
Win a Free Car!
Winning a large prize in a contest is problematic - if the prize is not cash. People who have won cars or other big-ticket gifts often find themselves behind the 8-ball when the tax man comes.
Winning a non-cash prize is problematic. And the problem is this: The prize is considered income, and thus has to be taxed. And since the prize is not cash, you may have trouble coming up with the cash to pay for the taxes on it.
Oprah discovered this the hard way, when she decided to give an entire audience of "needy folks" free Pontiac G6 sedans. This ended up backfiring in a big way for Pontiac, which now had its G6 sedan identified as the "car preferred by the homeless and needy" - which is hardly the upscale image you want to project to folks when selling a car. GM no longer makes Pontiacs.
Our tax laws dictate that people have to pay tax on income, even contest winnings. And for some reason, our Nation's Media decides, every time such a story is reported, to act as though this law, which has been on the books for well over half a century, is somehow surprising or shocking. Golly, Gee, they have to pay taxes on a car they won! How fair is that?
And unfortunately, when someone who is not very sophisticated with money "wins" a lot of money, or worse yet, a physical prize, the results are fairly predictable. They end up not better off than before, but often far worse.
The simple answer, is, of course, if you "win" a new car, to immediately sell it. The problem is that the IRS will value the vehicle based on the sticker price, which is not what you are going to get for it, as it is now a used car. Right off the bat, you may lost 10-20% (close to the latter, for a Pontiac) off the new-car price - even a negotiated new-car price.
So, if this is a $21,000 car (such a Pontiac G6), you may owe $5000 to $7,000 in taxes on it. If you are homeless or living on welfare, this might not be an option - it may take 1/3 of your annual income to pay the taxes on the car. You might be able to get a car loan from your credit union to pay the taxes, but then you are saddled with payments for the next five years. And now you have to buy collision insurance, which could easily run hundreds of dollars a month. If you are "needy" - these expenses could sink you, financially.
Far from being a blessing, such a "gift" could be a curse. People who don't understand taxes, as well as cars, end up with a broken-down used car, a huge tax bill, and a huge insurance bill.
The best thing to do, of course, is to sell the car, right away, before driving it anywhere. Even making a fire-sale to the dealer is better than nothing. Pay the taxes and put the rest in the bank.
The worst thing you could do is actually drive it home. One numbskull, as you are probably aware, tried to do this with a Lamborghini that was clearly worth double what his home was. If you are living in a $150,000 home, you have no business driving around in a $300,000 car. And of course, he wrecked the car the same day he took delivery of it.
Now he has a wrecked car, a $100,000 tax bill from the IRS, and a big black mark on his insurance. Once the car is fixed, he will have to sell it to pay the tax bill, and since it was wrecked, he likely won't get nearly the price he would have, had he left it at the dealer and sold it back to them. It was a very costly six hours of foolishness perhaps $100,000 worth of foolishness, considering he will be lucky to get $200,000 for the car, at this point.
Winning contests - even cash prize contests - is a mixed blessing and often a curse. Money obtained without work, wealth obtained without labor, is often corrupting and venal. What often results is not "happily ever after" but gross excess and tragedy. Easy money often disappears rather quickly, particularly when it is in the hands of people who have no idea how to handle money.
And the pattern is pretty predictable. A poor person wins a million dollars in the lottery. They assume, mistakenly, that a million dollars is a lot of money - not just enough to retire on, comfortably. Of course, the government wants half of it, up front, in taxes. They start spending - on a house, a car, a pool, etc. and then even start buying things for family members and friends. They give away money to their church and other charities. Before long, the money is gone, and there is nothing left to show but a bunch of broken-down cars and a house they can't afford to live in.
If the money is large enough, the winner finds themselves on the receiving end of a number of lawsuits - as co-workers routinely claim that the ticket was 'bought jointly' or some long-lost relative or business associate comes out of the woodwork alleging malfeasance. It is amazing to me how many of these winning tickets were claimed to have been purchased jointly by a group of friends at work. I've worked in factories and offices for 20 years and never saw a single instance of a "lottery ticket pool".
Once in a while, I buy a lottery ticket as a lark. But the jackpots they award here in America are ludicrous - tens or hundreds of millions of dollars. When I think about winning, I start to wonder if it would be better not to win at all. Winning $300 Million dollars might sound like a good thing, but I think it could easily ruin your life in short order.
Just managing that kind of money would be a full-time job. And of course, you could not trust anyone anymore. All sorts of hangers-on would try to ingratiate themselves to you, hoping for a slice of the pie.
And with that kind of money, would your spouse put up with your horseshit anymore? Likely she would be out the door by the time the check clears the bank. Sad but true, economic dependence is one thing that does keep relationships together. America has a high divorce rate, simply because we can afford it - or could, until the recession. With the decline in the economy, many folks are deciding to stay together - at least here in the States. In the UK, with its socialist economy, divorce is apparently a more economical option.
So what's not to like about winning a contest? You end up with skewed values, always worried about taxes and being ripped off, and surrounded by people trying to scam you. Oh, and your whole family disintegrates as a result of it.
You know, working for a living ain't so bad, is it?