Taxes on Vacation Prizes

How Much Will That "Free" Trip Cost You?

Taxes on Vacation Prizes
Be Aware of Hidden Costs of Free Vacation Prizes. Photography taken by Mario Gutiérrez. / Getty Images

Winning a free vacation sounds like a dream come true. Vacation sweepstakes give you the chance to win free trips to luxurious destinations, have unique experiences, or put together the trip of your dreams.

However, before you start entering every vacation giveaway you can, you should be aware that while the trip may be free, there are costs to winning. Most "free" vacations come with taxes and fees you need to pay.

Here are some things you should consider before deciding if the prize is worth the cost.

All Sweepstakes Prizes Must Be Declared on US Taxes

The first cost that you will need to budget when you win a trip is the income tax. United States residents are required to declare the value of their sweepstakes prizes on their taxes just like regular income. See How to Pay Your Sweepstakes Taxes for more details.

You may be able to save some money on the taxes you owe by determining how much the trip actually costs when you take it and disputing the ARV on your taxes if there is a difference. Vacation prizes often have a higher estimated retail value than they really cost.

If you live in a region other than the United States, check with a local tax professional to determine what your liability will be if you win vacation prizes. Canadian residents, for example, don't need to pay income tax on contest prizes.

Vacation Prizes Come with Additional Tax Costs

Aside from income taxes, there are also some taxes specific to vacation prizes. These include:

  • Port taxes for cruises.
  • Room taxes for hotel stays.
  • Airport taxes including the 9/11 security tax, fuel taxes, etc. for flights.

Some sweepstakes sponsors will pay these costs, while others pass them on to the winners.

Usually, the sweepstakes' rules will tell you which taxes aren't covered by the sponsors. If the rules aren't clear, you can ask the sponsor before you decide whether to accept or decline a prize.

Caution about Vacation Prizes and Scams

One of the warning signs of sweepstakes scams is when companies ask you to pay taxes to them. Usually, you pay taxes directly to the IRS, not to the sweepstakes sponsor. So if someone asks you to wire them thousands of dollars to pay your taxes before receiving your prize, it's a good sign that you're being scammed.

But vacation sweepstakes are a partial exception: The additional taxes for vacation prizes, like port taxes or airport taxes, aren't paid to the IRS. If they aren't covered by the prize, the sweepstakes' sponsor collects them. After all, when you buy your own plane tickets, you pay the airport tax at the time. The sponsor needs to do the same when they buy the tickets.

Remember:

Income tax on vacation prizes is still paid to the IRS.

If a sponsor asks you to pay port taxes or other vacation prize taxes, be sure to double-check the other list of warning signs of scams to make sure everything else seems to be on the up-and-up. Refer to the sweepstakes' rules to see whether these taxes were explained in advance and check that the amount you are being asked to pay is reasonable. This will help keep you safe from scams.

Free Trips Cost More than Just Taxes

When you are deciding whether you should enter to win a trip or not, keep in mind that vacation prizes come with costs other than taxes as well. Time off work, house sitters, new luggage or clothing to wear while you are on the road, and meals and other expenses can all add up.

Does This Mean You Shouldn't Enter to Win Free Trips?

While it's disappointing that even free trips carry costs, that doesn't mean that you shouldn't try to win. Even considering taxes and travel expenses, vacation prizes end up costing a fraction of what you would pay if you bought the trip yourself. Plus, many include unique experiences that you can't buy or cash to defray the costs.

It's wise to take a realistic look at what you would need to pay for your free trip, and then decide whether the cost will be worth it or whether you should decline the prize. In many cases, the answer will be an enthusiastic yes, but in others, you can spend your time better on other giveaways.

Disclaimer: Tax laws vary from country to country; this article regards taxes in the United States. This is not intended to be legal advice. For tax advice that matches your specific situation, consult a tax professional.