I recently had the opportunity to speak with a wonderful young lady who considered herself very lucky to have won a “Dream Wedding” from a bridal magazine contest. Having a daughter in college, it sometimes crosses my mind that I’ve seen her go from preschool through entering college and her next milestones could be getting her first job in the “real world,” getting married (hopefully not any time soon!) and becoming a mother (hopefully VERY far down the road….). So when talking with this “bride to be” and hearing that she won a $100,000 dream wedding, I was incredibly happy for her.
Then, she asked the question that made me slam the brakes on my excitement for her. That question: “What impact will that have on my taxes?” Ouch! That was the dose of painful reality entering the dream.
The answer to the question was a relatively straightforward one. Prizes are taxable at their fair market value. And, that’s where our conversation got interesting! What is the fair market value of a “Dream Wedding?” The answer is: it depends.
The way she was approaching this wedding brought about an interesting twist in the tax code. The prize package allowed for $6,000 for her dress. She, not wanting to go overboard on cost, spent less than $2,000. The limo package allotted for 2 stretch Hummer limos and she felt that was a bit more than needed, so she scaled that back. She isn’t a major spender, is somewhat frugal in her real life and even spending “other people’s money” is not exactly easy. (Note to any future Mrs. Smith out there: that’s a great quality!)
And that quality is exactly where the prize package and her tax return collide. If she does nothing in terms of record keeping and simply goes through the process, gets married, goes on her honeymoon and comes home, she will receive a 1099 at the end of the year for $100,000. And, on April 15th, she and her husband will be responsible for the tax on a $100,000 income.
Based on her income, her fiancé’s income, and their state of residence they will owe roughly $30,000 – $35,000 in federal and state income taxes. So, her “Dream Wedding” isn’t exactly free as she had initially thought. In the euphoria of winning a prize like that, hearing that it’s taxable is something that just gets lost in the moment.
Only after the excitement subsides and reality sets in can the full consequences of winning be recognized. She was able to laugh about the fact that prior to winning the prize, she was planning for a low budget wedding that, all things considered, would have cost maybe $15,000. It’s actually twice as expensive for her to win the prize! Thank you, taxes.
We looked at the question of defining “fair market value” (FMV). After all, what could be considered more definitional of FMV than what was actually paid for a good or service? By shopping for deals and not using the full $100,000, she has the opportunity to reduce her tax bill. If she spends $75,000, her tax bill could drop to $22,000-$26,000.
But there is some work to be done to make sure that she can reduce her tax bill. It would require getting an invoice/receipt from each vendor providing a service and tallying it all up to arrive at a total cost of the wedding. Then she has to work with the prize sponsor (the magazine) to ensure that they prepare a 1099 that reflects the true cost of the wedding and not the “fluff” that’s added on. If they don’t cooperate, there is a Form 4598 with the IRS to dispute the 1099 amount but with any luck, her frugal nature will help her to have a manageable tax burden after having an amazing wedding.
Her initial goal was a small, inexpensive wedding and the prize changed that goal into a much more grand event. And, she has enjoyed the process for sure! Hopefully with a little bit of planning, this dream wedding will not turn into a tax nightmare. For anyone winning a prize, a lottery, or a jackpot at a casino, be sure to set aside a significant portion of your winnings so that you won’t get a nasty surprise when your friends and mine at the IRS ask for their fair share of your good fortune.