When to Forego a ‘Free’ $5,000 Trip

When did “free trip” become an oxymoron?

In the world of airline loyalty programs, it’s been years since an award flight came unencumbered with all manner of fees, including the so-called fuel surcharges that can run up the cost of that nominally free flight to stratospheric levels.

And when it comes to sweepstakes featuring prize trips—which seem to have much of the same aspirational allure as mileage awards—the winners have always borne a significant cost: federal and sometimes state taxes assessed on the value of the trip.

Unlike frequent-flyer awards, sweepstakes winnings are considered taxable income, whether they’re cash, cars, or trips to Cabo. For any prizes valued at $600 or more, the sweepstakes sponsor is required to file Form 1099-MISC with the IRS, and the winner then must report and pay taxes on the prize’s value. (State tax policies vary, with 11 states allowing sweepstakes prizes to go untaxed.)

The tax hit can be substantial. Which is why I always, always make prominent mention of the prize trip’s ARV (approximate retail value) in my regular coverage of travel sweepstakes. And why Dottie ultimately declined to accept the prize she won in a sweepstakes she read about here.

“I won a sweepstakes last year from United’s MileagePlus. I turned it down because of the tax situation,” she explained in an email. The prize was a trip to Pebble Beach, including air, hotel, a food credit, and a round of golf, with an ARV of more than $5,000. “I felt that the taxes would have been about $1,250, which I didn’t feel was worth it to me.”

So, after determining that the prize couldn’t be donated to charity, she declined to accept it.

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It’s worth noting that taxes are assessed on the fair market value of the prize, which does leave sweepstakes winners some wiggle room. In Dottie’s case, for instance, the sponsor-claimed values of the airfare and accommodations were pegged at $1,200 and $820 per night, respectively. Given the restrictions typically placed on prize travel, a strong argument could be made to the IRS that those prices should be lowered considerably, thereby softening the tax blow. But engaging with the IRS entails a cost as well, in time, effort, and aggravation.

For her part, notwithstanding the outcome of her most recent sweepstakes experience, Dottie remains a fan. “I still enter sweepstakes when I see them.”

Reader Reality Check

Do you enter travel sweepstakes? You understand the potential tax consequences of winning, right?

More From Smartertravel:

• Airline Fees: The Ultimate Guide
• Earning Frequent-Flyer Miles for Tax Payments
• Low-Fare Airlines: How to Beat Them at Their Own Game

This article originally appeared on FrequentFlier.com.