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Travel Contests and Tax Consquences – How To Minimize Your Prize Tax Burden

by on July 24, 2013 · 16 comments

in Contests, IHG Rewards, IHG Rewards

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I love to win things as much as the next person, but the dark underbelly of travel contests and sweepstakes prizes is that travel providers usually attach really high valuations for  prizes – which is great for them as a tax write off, but terrible for the winners since you have to pay taxes on them.

When you’re winning miles or points, the Approximate Retail Value (ARV) is usually the price at which a company sells points outright. However, I think that sometimes much higher prices are assigned by sweepstakes companies or PR companies that run these contests and have no idea about the actual value and simply use valuations from other sweepstakes. Fortunately you can dispute the ARV as reported by the sponsor and you should only pay taxes on the fair market value of the prize when you received it.

Let’s take for example this new Instagram contest that IHG Rewards, the loyalty program of Intercontinental, Crowne Plaza and Holiday Inn among others, just launched. They will be giving away 100,000 points each week now through the end of August and a Grand Prize of 1 million points at the end of August.

If you end up winning IHG's contest, you could end up paying a huge amount of taxes!

If you end up winning IHG’s contest, you could end up paying a huge amount of taxes

For the purposes of this contest, the 100,000-point prizes – which will get you 2 free nights at some Intercontinental properties – are valued at an astonishing $3,500. Someone please tell me which genius running this promotion decided that an average night at an Intercontinental costs $1,750.

If you didn’t know any better and you got hit with the $3,500 value of the prize as “other income” and got hit within the 35% tax bracket, you’d be paying $1,225 for those 100,000 points, and it’s unlikely you’d get anywhere near that value unless you redeemed for ultra expensive hotels and even then you’re lucky to break even.

What makes this even more aggravating is that you can buy points directly from IHG for 1.2 cents apiece officially, and then you can actually get them for as low as 0.7 cents each through IHG’s Cash & Points option, which I outline in #7 in this post.

On the other hand, the Grand Prize of 1 million points is valued at just $5,000, or 0.5 cents apiece, so if I were to enter and win one of the weekly prizes, I’d dispute the ARV and claim the lower value of 0.5 cents per point so that my prize would have a value closer to $500 and therefore be under the threshold for prize taxation.

I’m not a tax adviser, so be sure to consult your accountant about any prizes you might win and the taxes you can expect to pay. But it does frustrate me how consumer-unfriendly these contests really are. Have you ever received a prize with a huge tax burden? Share your experiences below.

If you’re still interested in entering, here’s a video explaining the contest, and then you can find the rules below.

To enter, visit discover.ihg.com and follow the links and instructions to complete registration including a valid email address (that’s how you’ll be notified if you win) then use your smartphone to take a photo of an IHG property and include the hashtag #DiscoverIHG in the caption and add in your location and you’ll receive one entry into the weekly contest and one into the grand prize contest per picture.

Per the terms and conditions, the sweepstakes is only open to legal residents of the 50 United States and District of Columbia, Canada excluding Quebec, the UK, Germany, India, Indonesia, Mexico and Malaysia and you must be 18 years or older at the time of entry. Each winner must be an IHG Rewards Club member at the date they claim their prize (so sign up here). The contest runs until 11:59pm ET on September 1, 2013, and each weekly period begins on Monday and ends on Sunday.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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  • mjtaxpro

    I’m a tax preparer. my guess is that the businesses just put a high value on it so it looks like you’re getting a better value. their tax deduction isn’t based off of the value of the prize at all, its limited to their actual costs incurred. pretty bogus though, imo, since most people just accept what the 1099 says the value is and they pay the tax. most don’t realize you can figure the REAL value out yourself and use that number instead. be sure to document how you arrived at the value you use. the IRS has a document matching program where they are looking for that number on the 1099 to show up on your tax return and if they don’t see a number close to it you will receive a computer generated letter.

  • Twinky_the_Kid

    I won a RT flight from Air New Zealand a few years ago. Just in case they inflated the value I priced out the actual flight and saved it off for future tax purposes. Surprisingly, their 1099 was a fair price!

  • David Hurd

    I was watching Wheel of Fortune not too long ago and they had some five day trip to Mexico and with round trip coach valued at $12k. I mean ~$3k/night for Mexico??? I don’t think so.

  • JG Wentworth

    I won a prize of 25,000 united miles, what would you estimate is their fair value? I’m reading they sell 1000 miles for 24$, that seems to indicate 600$ no?

    Thanks!

  • 1099 Midv

    So how do you challenge the 1099?

  • 1099 Misc

    You still did a very smart move!

  • mjtaxpro

    You just put your number on line 21 on your tax return instead of the 1099 number. A better way might be to put the 1099 as one entry on line 21 and then as a second entry on the same line have a negative amount with a description of “adjust to actual fair market value”. By having the full amount as one entry you reduce the chance of document matching sending you an automated computer letter.

    That’s all you do to challenge it. If the irs sends a letter you’ll need to respond showing how you arrived at your number and why the 1099 is wrong.

  • 1099 M

    But it you don’t put
    on your return the full amount of the 1099 you will hear, for sure, from the
    IRS.

    Are you saying that you can put 2 numbers on line 21?

  • flyinace2000

    What can 25k miles get you. Easily a RT domestic coach ticket. So i would say $300-400.

  • mjtaxpro

    Yes. You attach a statement to the return showing all the line 21 entriess and then Obviously only one number, the net of the two numbers, actually shows up on line 21. Its the same thing as if you had two 1099s. Good software handles it for you. If you just put the one entry on line 21 you will almost be guaranteed to get a letter, but if you attach a statement netting the two numbers you most likely won’t since their computer will spot the actual 1099 number and move on. We probably do this 20 times per year for different reasons and almost never get a letter.

  • JG Wentworth

    Thank you!!!

  • Pat F of DCA

    We won 50000 United miles several years ago and the 1099 valued them at about $1500–double the value I thought they had based on two domestic tickets. Our accountant said we couldn’t fight it so we just paid the taxes; we were in the top bracket that year so we paid almost as much in taxes as the miles were worth. As a result, I’ll never enter a contest for miles/points again.

  • StayWiser

    Don’t put the winnings on your tax return..,..!

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