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Tax whammy for winners

Lottery balls spin in the hopper.

KAI RYSSDAL: Last week, a couple from Iowa beat the odds. 140,000,000 to 1. They claimed the $200 million Powerball jackpot. That's a pretty good return for buying just three tickets, don't you think? Yeah it'd be great to have all that money, but winning the jackpot comes at a price. And it's not just the lottery. We're talking here about smaller wins, like home makeovers and prizes on a game show. Every free gift has some strings. Just ask the IRS. Apryl Lundsten has more.

APRYL LUNDSTEN: Tobi Schneider won it all on the game show "The Price is Right." We're talking everything: a motorcyle, a car . . .

SCHNEIDER: And then I won the big prize, which consisted of luggage, jewelry, a trip to Hawaii and a second trip to Acapulco and Jamaica.

In total she took home over $30,000 worth of prizes. What Schneider didn't find out until after she won was she had to pay taxes on everything. Kay Bell is tax editor of BankRate.com, a personal finance website.

KAY BELL: People are still surprised that whenever they win any kind of prize, either cash or a product, they owe taxes on that cash or on the value of the item that they win.

She says it doesn't matter how much you win or what the prize is worth -- even $25 -- you still owe taxes on it. That includes cash, vacations and even home remodels, like the ones on the TV show "Extreme Makeover: Home Edition."

BELL: They're trying to do good things for people who need a new residence, but the house is a 'winnings' and that is something the IRS wants its cut of...and then you have the ongoing property tax issue.

Which, she says, is tough for folks who can't afford it. One makeover recipient in Encinitas, California had his property tax doubled -- from $2,600 to $5,200. And remember when Oprah gave everyone in her audience a free car?

BELL: I think it turned out that they owed about $7,000 for the car. Now that's a pretty good chunk of money to come up with unexpectedly.

She says in order to dodge unexpected tax hits, winners should see their accountants immediately to find out exactly how much they owe.

David Berger is a CPA and tax attorney in Los Angeles.

DAVID BERGER: It gets added to all of your other income and you pay tax on that amount of income.

It's a pretty simple form. It's called a 1099. The prize-giver will send it to you with the amount your prize is worth stated on the form. You then bring that to your accountant.

Kay Bell says to always double-check your 1099.

BELL: This is through an accountant I know. He had a client come to him and was upset he won a ski trip, not because it wasn't a good ski trip. But when he got the 1099 the amount of the ski trip was greatly inflated.

He got comparable prices from several travel agencies and was able to prove to the IRS that the price was too high.

Bell says with gambling winnings, it's a little different.

BELL: You'll get a different kind of 1099 and in those cases you have a little bit of an opportunity to offset the taxes by subtracting any gambling losses that you may have incurred.

So is it better to win a new car or a home remodel? Both Berger and Bell say it doesn't matter. But they do agree that when you win cash, at least you have money to cover the tax fees.

If you don't want the particular item you won, Berger says there are things you can do.

BERGER: A lot of times they'll give you the opportunity to take a cash amount instead of the award.

You could also sell the item, or donate it to charity. Kay Bell:

BELL: You'll still have to pay the taxes on what you won, but you might get to ease them a little bit by then writing off that as a deduction.

For Tobi Schneider, it was all about timing.

SCHNEIDER: We were fortunate in that we got some of the prizes around December 31 and then the rest came after the first of the year. So tax-wise we were in two different years.

So what happens if you just don't pay? Bell says you might end up in jail. Like Richard Hatch, who won $1 million on the TV show Survivor and then didn't pay taxes on it.

BELL: The contention there was whether he thought that CBS was going to cover the taxes for him or whether he set up a foundation but basically the ruling as the courts found was that Mr. Hatch won the money, knew he should have paid the taxes on the $1 million, and then refused to do so.

David Berger says there's an easy solution: Don't accept the prize.

In Los Angeles, I'm Apryl Lundsten for Marketplace Money.

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