Travel Contests and Tax Consquences – How To Minimize Your Prize Tax Burden
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
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.
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.