If you win a car, you’ll have to pay roughly one-third of the car’s value in taxes—but you might be able to lower your payment by working with a tax expert.
Whether your name was selected out of thousands in a raffle or you took home the top prize on a national game show, winning a car is a thrilling experience. Once the glitter and confetti fade, though, there’s an unfortunate reality to face: it’s time to figure out how to pay taxes on your new car.
If that sounds like a dreadful burden, have no fear—car insurance app Jerry is with you every step of the way to teach you about taxes on winning a car. We’ll walk you through how you can pay taxes on the car you won, what to do if you want cash instead, and best of all, how to shrink your tax payment and pocket more of your winnings.
How much are the taxes on a car you won?
As a general rule of thumb, your tax payment will be about one-third of your car’s value. So, if you waltzed away from a sweepstake with a $30,000 car, you’ll owe $10,000 in taxes.
The biggest portion of this payment comes in the form of federal income tax. When you file your taxes, the car you’ve won will be viewed as income, and will likely be taxed between 10% and 30% (depending on your tax bracket). Keep in mind that you won’t owe the money until April when taxes are due—so you’ve got plenty of time to plan!
The other major factor to be aware of is your state income tax. Nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—don’t have a state income tax. So, if you’re lucky enough to take home the top prize in the Lone Star State, you won’t have to pay a dime of state tax.
However, if you’re living in one of the territories where state income tax exists, you’ll be looking at an additional tax of up to 9%.
How do you pay taxes on a car you won?
If you’re ready to tackle the taxes on your prized car, you’ll need to research how much the car is worth, study how you can lower your payment, and start saving for Tax Day. Let’s go through each step together.
Step 1: Research the true value of the car
To get an accurate estimate of your car’s value, check out a few different sites (Edmunds TMV and Kelley Blue Book are two of our favorites). There’s a good chance that the people who are organizing the prize have inflated the car’s value just a tad—after all, a “braaaaand new $28,499 car” doesn’t really roll off the tongue!
If you can establish that the car is actually worth less than what they claimed, you might not have to pay as much when tax season comes.
Step 2: Learn how to decrease your tax payment
Next, it’s time to look into ways to reduce the amount you owe. Consulting a tax expert is the best way to get a detailed run-through of your options, but we’ll hit a few highlights for you:
- Contribute more to a 401(k). If you send more of your paycheck to your retirement account, you’ll lower your taxable income and pay less for that beautiful new car.
- Save for college. If you’ve got a savings account set up for your kids through a state or educational institution, you could cut down on your state income tax payment.
- Fund a health savings account. Putting money into an HSA and using it for medical expenses is a great way to deduct from your taxes.
Finally, if you really don’t need another vehicle, you can donate the car. You’ll be able to write off the car on your taxes and help out a friend, family member, or stranger in need—talk about a win-win!
Step 3: Budget and save
Before you know it, Tax Day will be here, so it’s a good idea to start saving early. Put together a budget and set aside a bit of cash each month for your tax payment.
Psst—want a quick and easy way to save some serious dough? Check out Jerry, our revolutionary car insurance app. We’ll get you the lowest rates within minutes—and the average Jerry user saves $887 a year!
What if you want cash instead?
Maybe you’ve already got a stellar car, but you wouldn’t mind some extra money. You’ve got two main options:
- Get cash directly from the promoter. Sometimes, the owner of the giveaway will offer an alternative prize: cash. Touch base with the promoter of the event to see if you can swap out your ride for a hefty check.
- Sell the car and pocket the difference. If you put it directly on the market, you might be able to dodge the depreciation of the car and get a strong offer. You’ll still take a hit when taxes are due, but you should be able to turn a profit.
What if you still can’t afford to pay the taxes?
If taking a cash prize isn’t an option and you can’t find a buyer for your car, these are your last lines of defense:
- Request a payment plan from the IRS. This will help you pay your taxes over time and lessen your financial burden a little bit.
- Reject the prize. If all else fails, you can refuse to take the prize from the promoter—that way, you don’t have to worry about paying taxes on it.
FAQ
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Is it better to keep the car or take cash?
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When do you owe taxes on a car you won?
Samuel Todd is an insurance writer with over three years of experience writing and editing content for various industries. Samuel specializes in helping car owners understand the ins and outs of what makes a “good” car, ensuring they always get the best value for their dollar. Since joining Jerry’s team of experts, Samuel has written nearly 200 articles for Jerry on topics including state regulations, common vehicle problems, and city insurance landscapes. Before joining Jerry, Samuel was an editor for Lamplight Books.
Kathleen Flear is an expert insurance writer and editor who previously lead up Jerry’s editorial team as director of content. Kathleen empowers drivers to make smart car ownership decisions through best-in-class articles on insurance, loans, and maintenance. Prior to joining Jerry in 2021, Kathleen served as managing editor for a team of SEO content marketing professionals at Article-Writing.co and worked as a freelance writer and editor for a range of digital publications, including Chicago Literati magazine and Golden Words. She earned a bachelor’s degree in English language and literature from Queen’s University, and a master’s degree in creative writing and fiction from Sierra Nevada University.
