The Real Cost of Reality TV
Program give-aways can be costly at tax time

Americans have a huge appetite for television programs that show everyday people winning prizes, collecting cash or otherwise catching a break. But for all the excitement the programs generate, the camera never reveals how big prizes can become big tax headaches.

What’s the catch? Generally, cash and merchandise received from television programs fall into the tax category of prizes, not gifts. And the Internal Revenue Service says prizes are the same as income and thus taxable at their fair market value.

Consider a much-publicized, recent example: On September 13, 2004, talk show host Oprah Winfrey stunned the nation when she gave away 276 Pontiac G6s to ecstatic audience members.

The new cars were valued at about $30,000 which could result in a tax liability of about $4,000 for individuals in the 15 percent tax bracket. The additional income the cars represent may even push some recipients into the higher, 25 percent tax bracket. In that case, the taxes could go up to about $7,000.

Another surprise is that the additional income resulting from the car could cost some recipients their eligibility in the Earned Income Tax Credit program, an initiative which refunds up to $4,300 for working people who make less than $36,500 a year.

While $7,000 for a $30,000 vehicle would be considered a good deal by most anyone, a representative of the Oprah Winfrey show was quoted as saying that the contestants were chosen because a friend or family member wrote in to say that the individual couldn’t scrape together enough money to buy any car.

Therefore, for many winners, $7,000 might as well be $1 million.

Some contestants apparently thought they could delay the tax hit by not taking delivery of the car until 2005, according to an article in the Chicago Sun Times. But the tax law says that any property or income you’re legally entitled to before December 31 goes on that year’s income tax statement.

The best scenario for some may be to sell the cars and use the after-tax surplus to buy a cheaper one, although they’ll still have to pay the taxes on the $30,000 value. But selling the car for full market value may be harder than it sounds, since sales of sedans have been sluggish in recent years.

Try this loophole on for size
One reality show has tried to come up with a creative financing plan to help its contestants avoid income tax costs. Extreme Makeover: Home Edition chooses a family in need and sends them to a vacation spot for 10 days while the program’s crew turns the family’s home into a “dream home.” The show “rents” the family home for those 10 days, paying the rent with $50,000 worth of appliances, big screen TVs and other large ticket items.

Since the tax law allows taxpayers to rent their homes for up to 15 days without reporting the rent as income, show producers hope their contestants won’t have to pay taxes on the $50,000 value of the improvements made during the rent period. Kathy Burlison, director of tax implementation for H&R Block, says Extreme Makeover’s plan may work.

“In Hawaii in the 1970s, for example, the television program Hawaii 5-0 often rented people’s houses for short periods and those rentals did not have to be reported,” Burlison says. “This is a similar situation. The main difference is that the homeowner is being compensated with improvements and a vacation rather than in cash. The way in which a prize is paid doesn’t matter in determining whether it’s taxable. The question is whether the IRS will see it the same way. The question to be answered is the nature of the payment: is it rent, a prize, compensation for appearing on the show, or some combination of these? It’s a question that will likely have to be decided by the courts, unless the IRS doesn’t object to treating the value as nontaxable rent.”

In any event, the families may see a spike in their property tax after the work is complete. Case in point: the home of one family nearly tripled in size due to an extreme makeover (The goal was to accommodate the widower and his eight kids). The project cost $572,879. The county’s assistant assessor was quoted in USA Today as saying that the property taxes doubled to $6,000 because the home was essentially a “new” house.

Homeowners who have benefited from extensive remodeling may have trouble getting the value out of the home if the property is worth considerably more than other homes in its neighborhood. Few people are interested in buying a $300,000 home in neighborhood full of $100,000 homes.

Still, so far at least, contestants aren’t complaining.

More than a pretty face
Then there’s the Fox network show, The Swan, in which ordinary women are transformed by multiple surgeries as well as diets, exercise regimens and hair and cosmetics makeovers. Afterward, there is a beauty contest and one wins a prize as ``The Swan.’’ One contestant, a single mother who worked as a waitress and lived with her parents, was scheduled for a jaw implant, a chin job, a nose job, eye and eyebrow lifts, liposuction, a tummy tuck, reconstructive dental work and dental veneers, among other things.

The fair market value of all this surgery came to more than $20,000. And that didn’t include her counselor, her nutritionist and her time at the gym.

Contestants receiving services like this will have to pay income tax on the value of the services provided. For instance, if a contestant receives$25,000 worth of surgery and rehabilitation, the contestant may owe more than $3,000 in taxes at a 15 percent tax rate. The contestant could also lose tax deductionswhich she may have gained through the Earned Income Tax Credit.

Contestants could make the argument that it’s a business expense, since their new look may gain them better tips at the restaurant or help achieve their dream of being a country and western singer. However, the IRS would almost certainly disagree with this deduction. Contestants probably won’t qualify for a medical expense deduction, either. Cosmetic surgery is deductible only if it meaningfully promotes the proper function of the body, is needed to prevent or treat an illness or disease, or is needed to correct a deformity or injury.

Be careful what you wish for
While great prizes make for great television ratings, individuals should understand the tax consequences before they get in line to have their lives enriched on the air. A prize, Burlison says, is a prize. And that makes it taxable.