OT: Any Tax Accountants Here?

[DaveHuskiesFan]

I won the grand prize sweepstakes entry on Tuesday. Need some advice on the tax implications I’m facing, specifically Approximate Retail Value vs. Fair Market Value

 

[CL82]

I won the grand prize sweepstakes entry on Tuesday. Need some advice on the tax implications I’m facing, specifically Approximate Retail Value vs. Fair Market Value

I'm not an accountant but take a look at this.

 

[DaveHuskiesFan]

I'm not an accountant but take a look at this.

Yeah I saw this this morning and it’s interesting. But my situation is a little different...

The grand prize is 1 Million American Airlines Miles which American Airlines has put an Approximate Retail Value (ARV) of $22,400 on. American Airlines will be sending a 1099 for the ARV. Given my tax bracket + state & local taxes totaling 30%, my Tax Liability on the ARV would be $6,720.

However, I am aware that ARV is not what you are taxed on, you are taxed on the Fair Market Value (FRV). I believe the FMV is somewhere around $12,000 and to know if I have sufficient evidence of that in the result of an IRS audit (below). Bottom Line: I wouldn’t accept the prize at a $22,400 value, but would somewhere between $10-15,000.

For the below examples I’m going to use a Valuation of Cents Per Mile (CPM). American Airlines is Valuing 1,000,000 Miles at $22,400 which imputes a $0.0224 CPM.

In the example above, American Airlines is willing to SELL me 215,000 Miles for $4,837.50, imputing a CPM of $0.0215 or a FMV of 1,000,000 miles at $21,500

In the example above, for the same exact flight (Date, Departure, Arrival, Flight #, etc). American Airlines will BUY from me 21,500 miles in exchange for a seat on the plane. They are charging $174 for a seat that same flight. This imputes a CPM of $0.00809 or a FMV of $8,093.

There are countless examples of the above, which I would be able to screenshot and provide as evidence. There are times where you can meet or exceed $0.0224 CPM (usually booking business class), but those examples are much less frequent than times where the CPM is significant lower than $0.0224.

The Ask: Are these examples sufficient evidence of that the FMV is less than $22,400? I would likely value that FMV at $12,000 on my tax return if I accept.

 

[CL82]

Yeah I saw this this morning and it’s interesting. But my situation is a little different...

The grand prize is 1 Million American Airlines Miles which American Airlines has put an Approximate Retail Value (ARV) of $22,400 on. American Airlines will be sending a 1099 for the ARV. Given my tax bracket + state & local taxes totaling 30%, my Tax Liability on the ARV would be $6,720.

However, I am aware that ARV is not what you are taxed on, you are taxed on the Fair Market Value (FRV). I believe the FMV is somewhere around $12,000 and to know if I have sufficient evidence of that in the result of an IRS audit (below). Bottom Line: I wouldn’t accept the prize at a $22,400 value, but would somewhere between $10-15,000.

For the below examples I’m going to use a Valuation of Cents Per Mile (CPM). American Airlines is Valuing 1,000,000 Miles at $22,400 which imputes a $0.0224 CPM.

View attachment 67279
In the example above, American Airlines is willing to SELL me 215,000 Miles for $4,837.50, imputing a CPM of $0.0215 or a FMV of 1,000,000 miles at $21,500
View attachment 67281

In the example above, for the same exact flight (Date, Departure, Arrival, Flight #, etc). American Airlines will BUY from me 21,500 miles in exchange for a seat on the plane. They are charging $174 for a seat that same flight. This imputes a CPM of $0.00809 or a FMV of $8,093.

There are countless examples of the above, which I would be able to screenshot and provide as evidence. There are times where you can meet or exceed $0.0224 CPM (usually booking business class), but those examples are much less frequent than times where the CPM is significant lower than $0.0224.

The Ask: Are these examples sufficient evidence of that the FMV is less than $22,400? I would likely value that FMV at $12,000 on my tax return if I accept.

It is a tough valuation issue isn't it? There is a huge amount of variation. As this article shows.

Then there's this chart:

Tricky issue. Good luck.

 

[DaveHuskiesFan]

It is a tough valuation issue isn't it? There is a huge amount of variation. As this article shows.

Then there's this chart:

View attachment 67282

Tricky issue. Good luck.

Yupp plenty of sources out there on how AA miles should be valued, question is what would work with the IRS!

 

[Brochacho]

Depends. What kind of return do you file? Have you been audited before?

There's no real authoritative guidance on this. Tax court is inconsistent. $10,000 underreported income isn't going to set off any alarms on the IRS end - we're talking about $2,400 that would be owed (assuming off your total tax estimate). Your FMV assessment seems reasonable. I'd accept it - but there would be discretion involved by the auditor (if you're even audited) and it would be taken into context of your entire return. The only thing I didn't see you mention and not sure if you're aware of it but with a prize of that size the sponsor is supposed be withholding 25% of the ARV for income taxes.

 

[DaveHuskiesFan]

Depends. What kind of return do you file? Have you been audited before?

There's no real authoritative guidance on this. Tax court is inconsistent. $10,000 underreported income isn't going to set off any alarms on the IRS end - we're talking about $2,400 that would be owed (assuming off your total tax estimate). Your FMV assessment seems reasonable. I'd accept it - but there would be discretion involved by the auditor (if you're even audited) and it would be taken into context of your entire return. The only thing I didn't see you mention and not sure if you're aware of it but with a prize of that size the sponsor is supposed be withholding 25% of the ARV for income taxes.

I file a 1040. Never been audited before.

I wasn’t aware of the 25% withholding...I’m curious how they got about withholding that when the prize is in Miles. The only information the prize form provides is that I may receive a 1099 at the end of the year for the ARV of $22,400

 

[Drumguy]

I'm a CPA and if you want to wait past May 17th I can spend some time and thought process. Tought to do more right now!

 

[Brochacho]

I file a 1040. Never been audited before.

I wasn’t aware of the 25% withholding...I’m curious how they got about withholding that when the prize is in Miles. The only information the prize form provides is that I may receive a 1099 at the end of the year for the ARV of $22,400

Yeah regular 1040, no prior audits - I wouldn't expect you to get picked.

I'm not sure on the withholding side if there is an exemption for non-tangible assets. If you got a 24k car, you pay 6k in taxes before driving it. Airline miles? Not sure. I'm sure they'd make it clear if you had to pay the taxes upfront.

 

[8893]

You can be a millionaire and never pay taxes:

 

[DaveHuskiesFan]

Yeah regular 1040, no prior audits - I wouldn't expect you to get picked.

I'm not sure on the withholding side if there is an exemption for non-tangible assets. If you got a 24k car, you pay 6k in taxes before driving it. Airline miles? Not sure. I'm sure they'd make it clear if you had to pay the taxes upfront.

I’d expect regardless I’m going to have to provide an explanation? Or you think even that may not happen

 

[Brochacho]

I’d expect regardless I’m going to have to provide an explanation? Or you think even that may not happen

To the IRS? You don't have to explain anything unless they ask about it after reviewing your return. On your tax return you just put the FMV on Schedule 1 Line 8. When you make the FMV assessment definitely hold on to what you used to determine the amount. They have 3 years after the filing date to ask you about your return so you'll want to retain it until 4/15/2025.

 

[DaveHuskiesFan]

To the IRS? You don't have to explain anything unless they ask about it after reviewing your return. On your tax return you just put the FMV on Schedule 1 Line 8. When you make the FMV assessment definitely hold on to what you used to determine the amount. They have 3 years after the filing date to ask you about your return so you'll want to retain it until 4/15/2025.

Thanks appreciate your help, I’ll likely end up accepting the prize. What a pain in the ass winning something can be lol

 

[willie99]

I'm going to suggest you start with reporting the full amount on your 1099. Any discrepancy will be snagged by the IRS computers when they're reconciling third party reporting (albeit 12 to 18 months later)

Then subtract the amount to believe is necessary to reflect FMV. 22,000 gross - 12,000 FMV adjustment for prize. Keep your calculations for a few years. I've taken this approach a couple of times over the years. I'm never afraid to defend a reasonable position.

 

[HuskyHawk]

To the IRS? You don't have to explain anything unless they ask about it after reviewing your return. On your tax return you just put the FMV on Schedule 1 Line 8. When you make the FMV assessment definitely hold on to what you used to determine the amount. They have 3 years after the filing date to ask you about your return so you'll want to retain it until 4/15/2025.

Yeah, I think it's unlikely that the IRS is going after small change like this unless the 1040 has some obvious flaw that triggers an audit.

 

[Mr. French]

I'm not, I have a will to live.

 

[Fairfield_1st]

I'm not an accountant, but I did stay at a Holiday Inn Express last night.

 

[J187Money]

Put a reasonable number down - risk is super low - if you aren't an audit risk normally - that $ threshold won't trigger an audit. There is always some risk, but as long as you think you have evidence that you are right, you can sleep at night and enjoy your miles!

 

[HuskyNan]

@JS
@Tonyc

 

[Jaker]

Taxes???? LOL